AN ANALYSIS OF A COMPANYS COMPETITIVENESS AND STRATEGIC DIRECTION THROUGH OUTSOURCING

A CASE STUDY OF APPLE INC

PREPARED BY NISHTHA PARIHAR (0033DODO0612)

MASTERS OF BUSINESS ADMINISTRATION CARDIFF METROPOLITAN UNIVERSITY

EXECUTIVE SUMMARY

Apple Inc commonly known as Apple has effectively managed to be a successful company in a very competitive consumer electronics industry by been innovative and differentiating the companys products with similar products in the markets by offering high quality products and good customer service while the actual manufacturing of the products is outsourced to trusted third party suppliers. On a wider perspective, the company has set high standards that even the company itself has to be on its level best to maintain the standards that it has set. Apple Computers started the movement into the personal computing arena in 1977 but through changes in management and differences of opinion together with missed opportunities it lost its competitive advantage to companies like Microsoft, Dell, and Gateway. Apple operates in various lines of the computer and music industry today and its operations include not only the designing but also the manufacturing of its computers and software. Apple continues to pursue the personal computer market but not as intently as in the years before Over the last few years, the consumer electronics market has become heavily commoditized which as a result has seen intense completion from competing firms in the industry where price has become the main aspect of the competition. By making use of the talented research and development team, Apple has been able to position its products as the best in terms of innovativeness, performance and reliability while compared to similar products in the market. However, Apple needs to continuously review its strategies to make sure that the company maintains its position in the industry for many years. This strategic plan review Apples performance and environment from various perspectives before strategic recommendations are made on the conclusion section. Among others the Internal Factor Matrix, External Factor Matrix and SWOT strategies have all been used in order to establish Apples current position in the market. In order for Apple to retain its position, the report recommends that the company increases its presence in markets where it is yet to have any presence, increase its social corporate responsibility initiatives and spend a lot of money in research and development so that new products with unique features can continue been developed. 2

CONTENTS
1. THE CASE STUDY BRIEF _____________________________________________________ 7
1.1 1.2 1.3 HISTORY OF APPLE __________________________________________________________ 7 BACKGROUNG TO THE CASE STUDY _____________________________________________ 8 TERMS OF REFERENCE _______________________________________________________ 9

INTRODUCTION _________________________________________________________ 10
2.1 2.2 2.3 2.4 OUTLINE OF CONTENT OF SECTIONS ___________________________________________ 10 APPLES CURRENT VISION AND NEED FOR CHANGE _______________________________ 11 APPLES CURRENT MISSION AND NEED FOR CHANGE _____________________________ 11 ACTIONABLE ASSUMPTIONS _________________________________________________ 11

THE PROBLEM OR OPPORTUNITY SITUATION AND ANALYSIS PLAN ________________ 13

3.1 3.2 3.3
3.3.1 3.3.2

APPLES CURRENT CHALLENGES AND COMPETITION ______________________________ 13 OPPORTUNITY _____________________________________________________________ 14 RESEARCH QUESTIONS AND OBJECTIVES _______________________________________ 15
RESEARCH QUESTIONS _____________________________________________________________ 15 RESEARCH OBJECTIVES ____________________________________________________________ 15

3.4
3.4.1 3.4.2

DATA SOURCES DATA COLLECTION METHODS ___________________________________ 15

TYPES OF DATA ___________________________________________________________________ 15 COLLECTION METHODS ____________________________________________________________ 16

ANALYSIS AND FINDINGS __________________________________________________ 16

4.1
4.1.1 4.1.2 4.1.3 4.1.4

SWOT ANALYSIS ___________________________________________________________ 16

STRENGTHS ______________________________________________________________________ 16 WEAKNESS ______________________________________________________________________ 16 OPPORTUNITIES __________________________________________________________________ 17 THREATS ________________________________________________________________________ 17

4.2

EXTERNAL AUDIT AND EXTERNAL FACTOR EVALUATION ___________________________ 18

4.2.1 4.2.2 4.2.3 4.2.4 4.2.5 4.2.6

OPPORTUNITIES __________________________________________________________________ 18 THREATS ________________________________________________________________________ 18 SOCIAL FACTORS __________________________________________________________________ 19 POLITICAL FACTORS _______________________________________________________________ 19 ENVIRONMENTAL FACTORS _________________________________________________________ 19 TECHNOLOGICAL FACTORS __________________________________________________________ 19

4.3
4.3.1 4.3.2 4.3.3 4.3.4 4.3.5

INTERNAL AUDIT & KEY FINANCIAL RATIO ANALYSIS ______________________________ 20

VRIN/VRIO MODEL ________________________________________________________________ 20 VALUE __________________________________________________________________________ 20 RARITY __________________________________________________________________________ 21 IMITABLETY ______________________________________________________________________ 21 NON SUBSTITUTABLE ______________________________________________________________ 21

4.4
4.4.1 4.4.2

INTERNAL FACTOR EVALUATION ______________________________________________ 21

STRENGTHS ______________________________________________________________________ 21 WEAKNESS ______________________________________________________________________ 22

4.5
4.5.1 4.5.2 4.5.3 4.5.4 4.5.5

PORTERS FIVE FORCES ______________________________________________________ 22

THREAT OF NEW ENTRANTS _________________________________________________________ 23 BARGAINING POWER OF SUPPLIERS __________________________________________________ 23 BARGAINING POWER OF BUYERS_____________________________________________________ 23 THREAT OF SUBSTITUTE PRODUCTS __________________________________________________ 23 RIVALRY AMONG COMPETING FIRMS _________________________________________________ 25

4.6
4.6.1 4.6.2 4.6.3 4.6.4 4.6.5 4.6.6 4.6.7 4.6.8 4.6.9

PEST _____________________________________________________________________ 25
OPPORTUNITIES __________________________________________________________________ 25 APPLE'S PURSUIT OF MUSIC INDUSTRY ________________________________________________ 25 MICROSOFT UPGRADE COSTS VERSUS BENEFIT _________________________________________ 25 VERY COMPETITIVE INDUSTRY _______________________________________________________ 26 COMPETITOR'S COPYING PROGRAMS _________________________________________________ 26 MICROSOFT DOMINANCE___________________________________________________________ 26 SOFTWARE PIRACY ________________________________________________________________ 27 GOVERNMENTAL REGULATORY INCREASES ____________________________________________ 27 GLOBAL COMPETITION INCREASES ___________________________________________________ 27 WORLD EPIDEMICS AFFECTING DISTRIBUTION AND MANUFACTURING ___________________ 28 AGGRESSIVE PRICING PRACTICES __________________________________________________ 28 MARKET SIZE __________________________________________________________________ 29

4.6.10 4.6.11 4.6.12

4.6.13 4.6.14 4.6.15

INDUSTRIES' DOMINANT ECONOMIC FEATURES ______________________________________ 29 DISTRIBUTION CHANNELS ________________________________________________________ 29 COMPETITORS: STRONGEST - WEAKEST _____________________________________________ 29

4.7 4.8
4.8.1 4.8.2 4.8.3 4.8.4

RIVALS ANTICIPATED STRATEGIC MOVES _______________________________________ 30 KEY SUCCESS FACTORS ______________________________________________________ 30

TECHNOLOGY RELATED ____________________________________________________________ 30 MANUFACTURING RELATED _________________________________________________________ 31 DISTRIBUTION RELATED ____________________________________________________________ 31 MARKETING RELATED ______________________________________________________________ 31

4.9
4.9.1

APPLES FINANCIAL ANALYSIS ________________________________________________ 32

APPLES CURRENT FINANCIAL POSITION _______________________________________________ 32

4.10

OUTSOURCING IN CHINA ____________________________________________________ 33

LABOR RIGHTS ON THE RISE ______________________________________________________ 33

4.10.1

4.11 4.12 4.12.1 4.12.2 4.12.3

DANGER OF OUTSOURCING __________________________________________________ 34 LEGAL ____________________________________________________________________ 37 INDUSTRIAL ESPIONAGE LAWS _____________________________________________ 37 COMPLIANCE WITH LABOR LAWS ___________________________________________ 37 ENFORCEABILITY OF CONTRACTS ___________________________________________ 37

PROPOSED PLAN OF ACTION _______________________________________________ 38

5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 UNDERSTAND BUSINESS THEMES AND DRIVERS _________________________________ 38 RETURN ON INVESTMENT (ROI) _______________________________________________ 38 VENDOR SELECTION ________________________________________________________ 38 PERSONAL MOTIVATIONS OFTEN DRIVE THE PROCESS ____________________________ 39 COLLABORATION, FLEXIBILITY AND TIME REQUIRED FROM BOTH SIDES ______________ 39 STRIKING THE DEAL _________________________________________________________ 39 THE PRICING QUESTION _____________________________________________________ 40 SIGNING THE DEAL AND PERFORMANCE MONITORING ____________________________ 40

5.9 5.10 5.11 5.12

FROM OUTSOURCING TO COMPETITIVE ADVANTAGE _____________________________ 40 MANAGING THE RELATIONSHIP _______________________________________________ 40 MONITORING PERFORMANCE ________________________________________________ 41 GOVERNANCE _____________________________________________________________ 41

6 7

CONCLUSION____________________________________________________________ 42 QUESTIONNAIRE ________________________________________________________ 43

Works Cited ________________________________________________________________ 50

LIST OF TABLES
Table 1 - EFE Matrix .....................................................................................................................................................20 Table 2 - Apple VRIN Analysis ......................................................................................................................................20 Table 3 - Apple IFE Matrix ............................................................................................................................................22 Table 4 - Apple Financial Figures .................................................................................................................................32 Table 5 - Apple financial Ratio .....................................................................................................................................32

LIST OF FIGURES
Figure 1 - SWOT ANALYSIS ...........................................................................................................................................17 Figure 2 - Potters Five Force Model .............................................................................................................................24 Figure 3 - Vendor Selection chart .................................................................................................................................39

1.
1.1

THE CASE STUDY BRIEF

HISTORY OF APPLE

In April 1976, college dropouts, Steve Wozniak (26 years old) and Steve Jobs (21 years old) founded Apple Computer. They actually partnered up a few years before when Wozniak, was a self-taught engineer, began building boxes that allowed people to make long-distance phone calls for free. The sale of a few hundred of the boxes led to a continuation that resulted in Wozniak working on the Apple I computer box. The team sold over 200 to computer hobbyists in the San Francisco Bay area. Wozniak began working on the Apple II and Jobs hired high school computer enthusiasts for building of circuit boards and for designing software. Steve Jobs came up with the idea of placing the circuitry into an attractive modular beige plastic container. Both were trying to provide customers (computer enthusiasts) with a smaller user-friendly computer. Jobs sought the help of Regis McKenna, a successful advertising relations firm owner, to develop an advertising strategy for the company. McKenna designed the Apple logo and advertised it personal computer magazines. By June 1977 sales reached $1 million and in 1978 they increased to over 35,000 computer sales. Growth continued at miraculous rates that in 1980 the company went public and sales were up to $117 million. Wozniak left three years later and Steve Jobs hired Pepsi Company's John Scully as president. Jobs and Scully difference of opinion led to Jobs leaving in 1985. This is about the time that Bill Gates and Microsoft were asking Apple to license its products and make the Microsoft platform an industry standard. Apple had established itself as a player in the corporate world with entry into the desktop publishing world, with the Mac Plus and Laser Writer printers. Competition in the late 1980s from the Microsoft Windows operating system combined with Apple's failure of the Newton hand-held computers caused earnings to drop dramatically. John Scully resignation and the workforce reductions took its toll as the company tried to shift gears to licensing its operating system to Macintosh clone producers. The strategy of marketing the licenses with intent of building market share actually backfired and lost Apple considerable amount of money and market share. Software was created to allow the Macintosh to connect to IBM-based systems and Apple's sales soared to over $4.07 billion.

In 1997, CEO Gilbert Amelio purchased Steve Job's company NeXT software with hope of creating Apple's next generation operating system. The move did not work and in 1998 CEO Amelio was thrown out and Jobs was placed back into the CEO position. Jobs quickly moved into a deal with Microsoft, cut cloning company licenses, stopped production of Newton handheld devices and printer products, and integrated its Claris software into its main offices. During this timeframe, Apple successfully introduced the iMac and iBook product lines and continues to push them in the consumers and education markets. It also has G4 portable and desktop versions that are marketed with focus on the designing and publish markets.

1.2

BACKGROUNG TO THE CASE STUDY

Apple Inc designs and later started to sell consumer electronics, personal computers and computer software. The Macintosh range of personal computers, iPod, iPhone and the iPad are among the Apples best known products. Some of the software sold by the company includes Final cut studio that is a music and video production suite, Aperture which is Professional photography software, iTunes media browser, Mac Os X operating system and Logic studio which is a music production suite (Apple, 2012). As of May 2012, Apple (2012) indicates that the company has over 300 stores located in more than ten countries in additional to the online store. (Banton, 2011) describes Apple has been among the largest technological companies in the world as far as companies traded in the world by market capitalization are concerned. According to (Banton, 2011), some analysts have even suggested that Apple has more cash than the US government. (Apple, 2012) States that, the company has more than 60,000 employees employed on permanent basis and 2,800 temporally employees worldwide. Regardless of the success that the company has enjoyed, it has at times received extensive criticism for the way it treats its contractors as well as the impacts that the companys operations have on the environment. Some of the heavy criticism that the company has received recently has been that workers working for Apple suppliers in China leave in unhealthy conditions where they are also paid meager wages. The aim is this report is to review Apples competitiveness and strategic direction through outsourcing in reference of the environment within which the organization operates in and as a result of the review, developing a good three year strategic plan for the company.

1.3

TERMS OF REFERENCE

The principal proposition of this paper is that implementing a successful outsourcing strategy for process must involve an analysis of a number of dimensions including relative capability in the process, contribution of the process to competitive advantage and the potential for opportunism from outsourcing the process. Analyzing each of these dimensions will provide Apple Inc with a number of sourcing strategies. The relationship between each of these dimensions and these sourcing strategies is analyzed and studied in this research. This paper analysis the strategically outsourcing other activities, including many traditionally considered integral to any company and for Apple Inc for which the firm has neither a critical strategic need nor special capabilities. The difficulties in outsourcing and how, Apple Inc can obtain competitive advantage over outsourcing. What is the potential vulnerability that could arise from market failure if the activity is outsourced? In reality, successful outsourcing - and in particular, outsourcing that drives transformation and helps achieve broad strategic goals requires companies to follow a disciplined process that keeps them focused on taking the right steps and making the right decisions. In short, outsourcing initiatives succeed by design, not luck. The report explores the key dimensions of this design five main dimensions of the outsourcing process that companies must progress through, as well as the factors that must be considered within each in order to reap the full benefits of the outsourcing. These dimensions are: Rightsizing the deal. Building a solid foundation. Vendor selection now means something different. Striking the deal. After the deal is signed.

2
2.1

INTRODUCTION
OUTLINE OF CONTENT OF SECTIONS

The trend towards outsourcing both locally and offshore has been increasing dramatically throughout the developed economies of the world. The drive for greater efficiencies and cost reductions has forced many organizations to increasingly specialize in a limited number of key areas. Outsourcing is increasingly being employed to achieve performance improvements across the entire business. Leading firms like Apple Inc have been adopting more sophisticated outsourcing strategies and have been outsourcing its core manufacturing process. In general the organizations which has been outsourcing its core process like designing, marketing, manufacturing and engineering have been benefiting greatly from accessing the specialist capabilities of suppliers in a range of business processes (Aron, R. and Singh, J. V., 2005). Many specialist suppliers can develop a greater depth of knowledge, invest more in systems and processes, and achieve efficiencies through economies of scale and experience. Leveraging the capabilities of more capable suppliers allows organizations to outsource more critical business processes and enhance their own internal core capabilities that drive competitive advantage. However, many organizations are failing to capitalize on the opportunities offered by outsourcing. Many organizations continue to make outsourcing decisions on a piecemeal basis and fail to develop outsourcing strategies for their processes that allow them to compete in the global economy (Gottfredson, 2005). In many cases, the choice of which parts of the business to outsource is based on ascertaining what will save most on overhead costs, rather than how the decision impacts upon the long-term capabilities of the organization. In some instances, organizations are outsourcing processes that are critical to competitive advantage and over time are relinquishing important knowledge sets and capabilities. Two influential theories in the study of outsourcing have been transaction cost economics (TCE) and the resource based view (RBV) of the firm. Transaction cost economics specifies the conditions under which an organization should manage an economic exchange internally within its boundaries (Williamson, 1985) . Another prominent theory employed in the outsourcing decision is the resource-based view which views the firm as a bundle of assets and resources that if employed in distinctive ways can create competitive advantage (Peteraf, 1993).

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2.2

APPLES CURRENT VISION AND NEED FOR CHANGE

Apples current vision as quoted by (Banton, 2011) states that, apple ignited the personal computer revolution in the 1970s with the Apple II and reinvented the personal computer in the 1980s with the Macintosh. Apple is committed to bringing the best personal computing experience to students, educators, creative professionals and consumers around the world through its innovative hardware, software and internet offerings. A closer look at the vision statement indicates that the statement is poor and needs change since it does clearly indicate how the organization will achieve its mission. In order for the vision statement to be seen as adequate, there exists a need for the statement to indicate objectives of the company in terms of been the industry leader which will be achieved by proving quality and reasonably priced product to the potential customers.

2.3

APPLES CURRENT MISSION AND NEED FOR CHANGE

Apples current mission statement as stated by (Banton, 2011) states that, Apple computers is committed to protecting the environment, health and safety of our employees, customers and global communities where we operate. We recognize that by integrating sound environmental, health and safety management practices into all aspects of our business, we can offer technologically innovative products and services while conserving and enhancing resources for future generations. Apple strives for continuous improvement, health and safety management systems and in an environmental, health and safety management systems and in the environmental quality of our products, processes and services. Unlike the companys vision statement, the mission statement can be argued to be quite detailed and well articulated since it covers all aspects required in an effective mission statement. From that perspective, Apples current mission statement does not need any change and should not be amended.

2.4

ACTIONABLE ASSUMPTIONS

Apple can be argued to be at a very strong position since the organization has different revenue streams and does not solely depend on the sale of computers. The company has more than 46,000 employees and had sales revenue of $ 65, 225 million in the year 2010. When it comes to volumes of music downloaded in the world, Apple is the market leader where as it among top five in computer products market just behind rival companies HP and Dell. Surprisingly, the slow economic growth experienced in various markets during the last few years have not had 11

major impacts on Apples performance as the companys net revenues have increased over the years. According to (Apple, 2012), Apples new Chief Executive Officer Tim Cook is quoted to have stated that 250 million devices that contained the iOS software such as iPhone, iPad and iPods have been sold while more than 1 billion Apple apps are now been downloaded per month from the Apple App store where as $ 3 billion has been paid out to developers, the users of Mac worldwide were approaching 60 million which implied the company had a 23% market share of the PC industry as of August 2011 where as the iPhone growth year on year basis has been 125%. In order for Apple to continue achieving the same kind of success, Apple Inc has the capability to aggressively get into marketing of its product. Apple already has a strategy and taken necessary steps to explore new market segments and establish its presence in new countries.

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THE PROBLEM OR OPPORTUNITY SITUATION AND ANALYSIS

PLAN
3.1 APPLES CURRENT CHALLENGES AND COMPETITION

Apples biggest challenge is been able to find the appropriate replacement of the visionary Chief Executive Officer (Steve Jobs) who died on October 2011 and was responsible for turning the company into what it is currently. Apple needs to pursue Steve Jobs strategies that propelled the company to new heights as the company was viewed as been innovative and market leader when it comes to new products. Another challenge posed by Apple is that there is increased completion from established competitors like HP, Google, Microsoft and Dell among others. In addition, environmentalists have regularly accused Apple of not properly disposing its old products were as high level of toxic chemicals are believed to be contained in Apples products. Apple competes in three different fronts namely the computer industry, handset industry and the music industry. Apple relies on its innovative design team to design and create the various operating system and hardware that differentiate the companys products with the products offered by the competitors. The companys apparent quality means that the company is able to charge high prices for its products while compared to equivalent products by the competitors. During the last few years, Microsoft and Google who are some of Apples biggest competitors have developed products that can be argued to be in response to Apples innovative products. Googles Android platform has been developed to directly compete with Apples iOS platform that runs through all the iPhone where as Window 7 was introduced in order to give windows user a Mac OS feel. As far as the computer markets are concerned, Dell sells more computers than Apple simply because the company has adopted a low price strategy where as Apple charges premium prices for its computing products. Apple continues to work on providing innovative products for its customers but marketing to such as small market has caused some problems. Its market share has been reduced to below 5% and its operating system differs considerably from the Wintel operating system used my dominant Microsoft. Costs of maintaining this difference have increased in comparison to those utilizing the competitive operating system. Software designers are not as enthused about writing programs to support Apple's operating system because of limited potential sales. The advantages 13

that seem to come into Apple's laps are quickly removed because competitors are able to copy, steal, and share them. The one advantage that Apple possesses is its operating system but it has failed to convince the world of its superiority. The operating system in possession has not encountered the problems that Microsoft and its fellow operating systems have encountered. Microsoft upgrades have been plagued with virus and other programming problems, including the ability of hackers breaking into the system and accessing ones computer from another remote spot. Apple has not capitalized on these problems. It has gained a few customers but nothing in the numbers required to turn the company upwards in reclaiming considerable market share. Apple customers are a devoted group that understand the superiority that they possess but convincing the other 95% of the world because a rather large task.

3.2

OPPORTUNITY

Apple is the company with the best systems in place for each of these markets so they should focus on continued support for each in a restrictive manner. Cost of supporting such programs in a niche market sense should be reviewed financially so that R&D costs do not pull the company into an impossible position of making a profit. Apple can better integrate its operating systems so that they operate within the Wintel operating platform but are not subjected to the Wintel operational problems. Apple has shown to be a better operating system that is less vulnerable to problems encountered by Microsoft and its fellow operating system packages. It should promote this while melding its operating platform operation into a subunit of the Wintel platform. Apple should negotiate contracts with the government and the school systems in each state for offering improved success rated teaching software and hardware. Apple's products have been documented as providing students with improved scores so Apple should flaunt these successes with focused experimenting in regions of certain states. Continued successes could create a widespread need for these products. The systems can run independent of other Wintel operating platform computers already being used. This integrating within the school systems engrains the Apple name in all of the youngsters in the United States and even abroad once successes are

14

shown to be ever sustainable. Younger generations will remember the systems they used when in school and will be swayed to purchase such recognizable products in the future.

3.3

RESEARCH QUESTIONS AND OBJECTIVES

3.3.1 RESEARCH QUESTIONS This paper analysis the strategically outsourcing other activities, including many traditionally considered integral to Apple Inc for which the firm has neither a critical strategic need nor special capabilities. This study will answer the following questions: 3.3.2 The difficulties in outsourcing and how Apple Inc can obtain competitive advantage over outsourcing. What is the potential vulnerability that could arise from market failure if the activity is outsourced? Trend of competition Is the regulatory system in china concerning it outsourcing? Influence of technology Cost factor of outsourcing Ensuring efficiency of labor. RESEARCH OBJECTIVES Is Apple Inc outsourcing the right process to the right people. Aligning the outsourcing strategy with business strategy. Does outsourcing really help Apple Inc to stay competitive and be successful? An Analysis on Apple Inc Financial position.

3.4

DATA SOURCES DATA COLLECTION METHODS

3.4.1 TYPES OF DATA Most of the data collected here is secondary through pervious researches done and data from the preferred database ETF Knowledge Centre used by Apple Inc and databases of File Maker by Apple California, US. But some of data is primary data from the questionnaire; taken from the targeted population such as employees.

15

3.4.2 COLLECTION METHODS The methods used here are mostly qualitative methods through focus groups interviews, in-depth interviews, case studies and experience surveys. The quantitative collection methods were mostly from the targeted audiences and top managements.

4
4.1

ANALYSIS AND FINDINGS

SWOT ANALYSIS

SWOT analysis is a strategic planning technique applied to examine the strengths, weakness, opportunities and threats within an organization. Once a SWOT analysis has been conducted, an organization is then able to develop four different type of strategies that includes SO which stands for Strengths Opportunities strategy, WO which stands for Weakness Opportunity strategy, ST which stands for Strengths - Threats strategy and WRT which stands for Weakness Threats strategy. In most organization, SWOT strategies are the most implemented strategies since they are usually a combination of external factor evaluation (EFE) and internal factor evaluation (IFE) thereby helping a company exploit the opportunities to the maximum while at the same time avoiding any threats. 4.1.1 STRENGTHS Apples strengths includes a strong brand image that gives the company a competitive advantage over its competitors, talented and innovative research and development team that is behind Apples revolutionary products and strong financial performance that gives investors confidence to invest in the company implying that the company cannot lack capital for any new venture that the organization wishes to pursue. 4.1.2 WEAKNESS The company has recently been involved in numerous case battles involving intellectual rights that might affect the companys performance. In addition, Apple has recalled some products due to risks they pose to the customers something that has created a negative image of the company.

16

4.1.3 OPPORTUNITIES There is huge potential in the smart phone and tablets market that can increase the companys revenues over the years. Moreover, there is a highly potential mobile advertising market that can be exploited. Strength Opportunity Strategies Make use of the strong brand name Keep the Apple software only compatible with Apple products Establish presence in new markets Increase the number of Apple retail stores Strength Threat Strategies Aim at increasing Apple brand awareness which will eventually result to increased sales revenues Continue been innovative and

market leader in the tablet and smart phone markets

Weakness Opportunity Strategies Encourage innovation throughout the organization Reduce the prices of the products during promotions or new product launches. Increase production in Asia

Weakness Threat Strategies Make sure that almost any kind of music is available for download on iTunes. Establish working relationship with Microsoft Probably try to launch product lines that are not quite expensive like the Apple products.

Figure 1 - SWOT ANALYSIS

4.1.4 THREATS The increasing popularity of Googles android platform will definitely affect Apples sales revenues in terms of volumes of smart phones and tablets sold. In addition the sales volume

17

might be affected by the increased competition from other competitors as well while the dependence on only few suppliers might pose as a challenge to the company in the near future.

4.2

EXTERNAL AUDIT AND EXTERNAL FACTOR EVALUATION

4.2.1 OPPORTUNITIES By intensifying its efforts in China, Apple can be able to considerably increase the number of its customers since the population of China is approximated to be over one million people. In addition to China, Apple should also aim at increasing its presence in other potential markets that the company is yet to establish presence in. Apple should exploit the effective research and design department that it has to the maximum to make sure that the company continues to develop new innovative products that are attractive for the mass market. The increased number of computer viruses and worms can be argued to be a major opportunity for Apple to increase its market share in the computer markets since Mac OS computers cannot be attacked by viruses. The recent efforts by various governments to crackdown on illegal file sharing websites means that Apples iTunes can now appeal to a wide clientele base. 4.2.2 THREATS The numerous illegal file sharing sites poses great threat to Apples iTunes as potential customers who would have paid money to Apple in order to be able to download songs usually ends up getting the songs free of charge by downloading them form the illegal file sharing sites. The recent economic downturn has meant that consumer spending power has been drastically reduced which in turn would in turn mean low sales figure for Apple products. Even though Apple revenues continue to increase despite the hard economic times, it is important that Apple anticipates situations where customers prefer other products since they are cheap. Another threat faced by Apple is that the company is faces strong completion from its competitors. The organizations that Apple competes with are also well established and pose a threat to Apple since they can create products that directly compete with Apples products at cheaper costs. Majority of companies in the technological world have the perception that Apple products are not compatible with the widely available software like Microsoft. The fact that Apple depends on few contracted partners to produce Apples products means that the company is exposed to product supply risk which may adversely affect the operations if they occurred at any time.

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4.2.3 SOCIAL FACTORS Apple products have proved to be successful in various cultures basically due to the fact that the products are dependent on advancement of technology something that has been embraced in almost all corners of the world. That said, Apple needs to thoroughly consider each market as an individual market and develop marketing strategies that are going to be effective in each market. 4.2.4 POLITICAL FACTORS Since Apple has presence in various countries, the company has to make sure that it adheres to the specified rules and regulations in the various countries in terms of tax rates to be paid, employment rules, business rules and many other aspects. 4.2.5 ENVIRONMENTAL FACTORS As far as the environment is concerned, (Apple, 2012) states that the company thoroughly considers the impact that the companys products have on the environment when been used and after they have stopped been used. The company states that less material is now been used in all aspects of the products to make sure that the impacts that the company has to the environment is minimized to the lowest level possible. 4.2.6 TECHNOLOGICAL FACTORS Apple is widely considered to be among the most technological innovative company in the world. The companys products are seen as market leaders in the various sectors that Apple serves and competitors have to be always on their toes in order to make sure that they have products that can compete with Apples product offerings at all times. The weighed sum of 3.5 indicates that Apples strategies should be effective in making use of the opportunities in the industry while at the same time dealing well with any threats.

Key External Factor

Increase presence in other countries New Product developments Increased virus and worm attack Government crackdown on illegal downloading sites

Weight Rating 0.15 0.10 0.10 0.15

Weighted Score 4 0.60 4 0.40 2 0.20 4 0.60

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Threats Various existing illegal file sharing websites Economic downturn Competition from established competitors Perception that Apples products are not compatible Very few suppliers TOTAL 4= Superior Response 3= Above Average Response 2= Average Response1 = Poor Response
Table 1 - EFE Matrix

0.10 0.05 0.15 0.10 0.10 1.00

4 4 4 2 3

0.40 0.20 0.60 0.20 0.30 3.50

4.3

INTERNAL AUDIT & KEY FINANCIAL RATIO ANALYSIS

4.3.1 VRIN/VRIO MODEL The VRIN or the VRIO model is a resource based view that examines whether an organization can use its resources in order to create a competitive advantage.
Competitive Advantage sustained sustained Parity Temporary

Resource Apple Brand Ease of Use Hardware Used Apple Software

Value Yes yes Yes Yes

Rarity Yes No No No

Imitability Yes No Yes No

Non-Substitutable No Yes Yes No

Table 2 - Apple VRIN Analysis

4.3.2 VALUE The main aim of majority of Apples products is to integrate multiple functions in one product so that users can be able to get value for the products that they purchase from Apple. This approach makes Apple products give value to customers since they can do quite a lot with one single product. For example, an iPad gives value to users in the sense that it can be used to make voice calls, watch movies, listen to music, and take photos, internet browsing and editing documents among others.

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4.3.3 RARITY There exist numerous products in the market that directly compete with Apples products. However, Apple has been able to position its product as the ultimate products in terms of innovativeness, performance and reliability as customers view them to be of higher quality while compared to similar products in the market. It is this uniqueness in the products that helps make Apple a successful organization. 4.3.4 IMITABLETY There exist various products in the market that can to an extent offer the same features offered by Apple products. In particular Googles Android platform was developed after iPads and iPhones proved popular with customers. However, Apple has already managed to position its products as been the best that the market has to offer implying that it would take some time before Apple loses its position in the market. 4.3.5 NON SUBSTITUTABLE Apple products can all be substituted with other alternative products. But what cannot be substituted is the esteem that comes with the brand name something that has helped Apple attracts more customers while keeping hold of older customers.

4.4

INTERNAL FACTOR EVALUATION

4.4.1 STRENGTHS The iTunes platform is good revenue stream since it is available for various Apple products and is also compatible with Windows platforms. The companys loyal customers mean that Apple does not have to compete with competitors in terms of prices but in terms of performance and reliability. The fact that the company has no debts means that Apple is able to invest in any undertaking that the management deems to be appropriate for the organization. The point that Apple always develops it existing products means that the company will always be able to attract new customers or encourage repeat purchases from existing customers. Apples flagship retail stores serves as demonstration points where customers who doubt any features of Apples products can get to test them. Finally apart form informing customers about the features of all Apples products, Apples website is also used as a sales channel to customers who prefer to buy online and direct from Apple. 21

4.4.2 WEAKNESS Apple depends too much on product launch to help create attention for its products. Moreover, the company has weak relations with other key organizations in the market that have the potential to take Apple to new heights if Apple was willing to partner with these organizations an ideal example been Microsoft corporation. Finally, unlike the other competitors who have strong presence in various markets, Apples presence is mainly concentrated in Japan, America and Europe.
weighte Weight Rating d Score 0.10 4 0.40 0.10 3 0.30 0.15 4 0.60 0.15 0.15 0.15 0.10 0.05 0.05 1 3 4 3 2 1 1 0.45 0.60 0.45 0.20 0.05 0.05 3.10

Key Internal Factor

Tunes platform is a good revenue stream Customer loyalty that makes the customer price insensitive No debts means Apple can invest in other sectors Existing products are of high quality while compared to competing products in the market Strong brand that is quite popular among the Apple customers Apple products are hard to imitate Weakness Apple is too much dependent on product launch Poor relations with other key players like Microsoft Strong presence only limited to few countries TOTAL

4= Superior Response 3= Above Average Response 2= Average Response1 = Poor Response

Table 3 - Apple IFE Matrix

Apples weighted score of 3.1 proves that Apple has effective strategies in place that can respond well to the opportunities and threats in the business environment.

4.5

PORTERS FIVE FORCES

Five Forces Model of Competition Every market including the financial industry can be evaluated through the use of Porter's fiveforce theory. Porter's uses the five forces, supplier power, and barriers to entry, threat of substitutes, buyer power, and the degree of rivalry, as tools that help analyze a company's position against its competitors. 22

4.5.1 THREAT OF NEW ENTRANTS Startup costs are extremely high so the probability of new entrants is low. The existing companies have capitalized on the distribution channels and have created strong branding awareness that makes it difficult for new comers to compete. The probability of success is so low that competitors pursue niche markets rather than trying to compete with the bigger companies. Apple positioned itself years before so it has created its space in the computer industry just as IBM, Hewlett-Packard, Gateway and Dell. 4.5.2 BARGAINING POWER OF SUPPLIERS The suppliers are plentiful and must compete with others to ensure that they will be able to retain the business of the computer companies. The position is low especially since the larger companies can readily switch to another supplier without any major repercussions. Suppliers adjust pricing and quality to make their products more attractive so competition is high leaving them in a low supplier power position. 4.5.3 BARGAINING POWER OF BUYERS All of Apple's customers have a variety of computer companies from which to chose when it comes to purchasing hardware, software, or peripherals. Switching costs are low. The buyer has the ability to switch when quality, service or price offered elsewhere is better or cheaper. This situation places the buyer power in a strong position that can only be countered by companies with strong product differentiation that would increase the switching costs. The computer operating systems differentiation makes it difficult for companies to switch but individuals will find it rather easy to change from one computer system to another. The same difficulties and cost apply to the education facilities that have committed to a single operating system. 4.5.4 THREAT OF SUBSTITUTE PRODUCTS Substitute products are readily available so this threat is very high. Competitors work to convince their customers that their product is superior to its competitors. The more differentiation of product the less likely the switch to a substitute will occur. If prices are higher then the company with the higher price has to provide justification for the increase. Apple's operating system differentiation can command higher pricing when it is presented to the creative designer community but not to the individual computer buyer unless they are specifically looking 23

for such enhanced graphic capabilities. The market is favorable for the companies that have locked a business or educational facility since substitution will require a change of each

Reliance on underlying, proprietary standards Few chip designers, one dominant player High switching costs from suppliers Suppliers reliant on industry for distribution and consumption

Threat of Potential Entrants

Economies of scale Outsource to OEMs for production Several large, entrenched established brand loyalty players with well

Convergence of mobile devices, mobile phone makers entering market OEM forward integration

Supplier Power

Rivalry between Competitors Buyer Power

Commoditized product, intense price competition Intense competition for large corporate contracts Breakneck product/technology lifecycle pace Products based on standardized components, difficulty in differentiation Consumer dependence on computers, high demand

Threat of Substitute

Varying needs, latest and greatest. Just good enough Difficulty of switching to/from proprietary platforms

Feature-rich smart phones Alternate forms of entertainment Central hub for leisure, entertainment, information, and work

Figure 2 - Potters Five Force Model

computer within the facility and in some cases more than one location. Internet connectivity has increased the ability of switching individual units while the others remain the same.

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4.5.5 RIVALRY AMONG COMPETING FIRMS Apple has many competitors that have the advantage of possessing the larger portion of market share. Apple is faced to compete against companies like IBM, Hewlett-Packard, and Dell. Even a smaller company like Gateway poses a threat. Competition is fierce in the computer hardware industry and switching costs are low. Apple is also reliant on promoting its own operating system. The digital hub being pursued by Apple has already been copied by Gateway.

4.6

PEST

4.6.1 OPPORTUNITIES Apple's different operating system Apple can take advantage of its operating system differences by turning it into an opportunity to develop improvements to the Macintosh platform in order to achieve greater perceived functional and design advantages over competing platforms. Various computer worms and other hacker anomalies that provide a grand opportunity for Apple to take advantage and garnish some small sectors of this frustrated market. With such a widespread system the vulnerability increases and fixes are not easy to make in short time periods. Microsoft bashers love to point out that Linux or Apple's OS X are not vulnerable to whatever the exploit du jour is on the Microsoft platform (Bradley, 2004). The Apple Mac OS X is seen as a stable, reliable, and secure system that is also very easy to use. 4.6.2 APPLE'S PURSUIT OF MUSIC INDUSTRY Apple's pursuit of the music industry through its iTunes also provides a good opportunity to increase Apple's bottom line and also increase brand awareness. The launching of the iTunes Music Store resulted in over 2 million downloads in only 16 days. All of the downloads were all done on Macintosh computers. Apple's opening of its music store worldwide will be a great opportunity 4.6.3 MICROSOFT UPGRADE COSTS VERSUS BENEFIT Microsoft users are finding it less feasible to continually upgrade software packages unless they can truly see a benefit for the money being spent. The last few Microsoft upgrades have been plagued with glitches that provide another grand opportunity that Apple can use to its advantage so long as it doesn't make the same mistake with its issues of upgrades. The customer will continue to look for value when money is spent. 25

4.6.4 VERY COMPETITIVE INDUSTRY The market for design, manufacturing, and sales are all extremely competitively aggressive in Apple's business. The rapid technological advances made by competitors in the hardware and software segments has increased the number products offered in shorter time spans. Price competition, including sellers with computers with other operating systems, has been very intense as the battles for increased market share rise. All of these affect gross margin, especially when combined with increased reliance on the Internet and the miniaturization of components that decrease prices since they are smaller and simpler. 4.6.5 COMPETITOR'S COPYING PROGRAMS Companies such as Future Power USA copied Apples Imac and have been selling it. These copies pose a major threat to Apple sales. The copies look identical to the iMac even to the point of making the colors the same but under different names. These copycat computers can even be considered as substitutes for an iMac. Website www.lowendmac.com states that many other companies are copying the iMac either because they are too lazy to come up with a different design or because the iMac is such a great idea everyone wants to copy it (LowEndMac, 1999). Competitors are quickly mimicking the unique presentations of digital music products. Entry into these markets is costly but unfortunately for Apple the competitors have an abundant supply of funding to address marketing, manufacturing, and technical resource requirements that may arise. Consolidation of major players has made for larger and potentially stronger competitors. Competitors are even promoting free peer-to-peer services. 4.6.6 MICROSOFT DOMINANCE Microsoft Windows continues to dominate the market. More than 90% of the world's computers use the Microsoft operating system. Apple needs to work on convincing the world that its system is better than Microsoft. This dominance and need to overcome the world's mental state of thought about Windows operating systems is a major threat to Apple (ProComp, 2004). Windows based PCs have cut prices and lowered product margins to maintain market share since demand has been declining during the past few years. This pattern does not seem any brighter in the near future so these practices are very likely to continue. PC technological advances in software and hardware, and miniaturization of parts, together with a more reliant Internet movement make the competition for market share even hotter. 26

Apple's operating system has lost some of its market share during the past few years but is working to regain its losses. The introduction of the G5 has helped with sales, as have the Power book portables. Apple's operating system has provided graphics and creative designers with a useful tool that is not comparable to Windows operating system applications. This difference must be managed with continued improvements that allow the public to perceive design and functional advantages over the competitors' operating system platforms. Failure to compete effectively could cause a negative effect on Apple's financial and operating results. 4.6.7 SOFTWARE PIRACY Software piracy has been a problem for software and operating systems producing companies. As the technology advances the more susceptible the companies become to additional piracy. The piracy issue has grown to global proportions and stopping unlawful copying and distribution of copyrighted software does not seem to have a remedy for prevention in the future. 4.6.8 GOVERNMENTAL REGULATORY INCREASES Governmental regulations and potential litigation from non-compliance has persisted as a threat from the early years. In 1991, Apple phased out the lead in the batteries and in 1992 dealt with the chloroflurocarbons (CFCs) in manufacturing. The years 1996 brought about implementation of ISO 14000 quality standards and by 2000 all Apple manufacturing sites were ISO 14001 certified as having a structured environmental management system (EMS). Tetrabisphenol A (TBBA) was voluntarily phased-out of all plastic enclosure parts in quantities greater than 25 grams. These are just a few examples of how the governmental regulatory requirements continue to pose a threat to the computer and electronic industry. Apple has initiated a lot of environmental safe programs voluntarily but each is costly to implement even though compliance far outweighs the cost of non-compliance. 4.6.9 GLOBAL COMPETITION INCREASES Competition continues to increase worldwide. Other countries are getting into the manufacturing as the expansions of existing companies occur. Cheap labor and parts manufacturing in less privileged countries provide opportunities for larger companies with extra capital to spare for expansion. Pursuit of savings drives them into the other countries and with labor and parts costing less they utilize that as a means for cutting costs making them more competitive. The amount of product introductions hitting the market requires that each company continue pursuing 27

more innovative products in a shorter period of time. Lack of newly enhanced product will reduce customer demand even more than what is being affected by the weakened economy. Companies must hope that the product introductions will be well received by the consumers. If the product is well received then the company must be in a position to ramp up production in short order but not enough to be overwhelmed by large inventories when the sales regress. This need for judging demand is critical and must be determined as accurately as possible because over supply will lead to dead inventory and not enough supply will lead to unhappy customers. Finding the balance is very difficult. Innovations within the operating systems must continue to support the existing systems at the risk of losing customers should this not occur. 4.6.10 WORLD EPIDEMICS AFFECTING DISTRIBUTION AND MANUFACTURING The world has been riddled by a few major epidemics that have disrupted the normal distribution and manufacturing channels of much industry. Some reached proportions that even affected travel into and out of the country. Year ago this type of epidemic would not have created the effects that it presently does in this global system. China, Hong Kong and other Asian countries were subjected to quarantines implemented by the World Health Organization and Centers for Disease Control and Prevention when severe acute respiratory syndrome (SARS) advanced to epidemic proportions. Apple utilizes these countries for manufacture and production of its iPod so diseases such as this affected employee travel, limit freight services, instill governmental restrictions in product movement, and can delay production and operations. 4.6.11 AGGRESSIVE PRICING PRACTICES Competition in this highly competitive market faces overcoming aggressive pricing practices, frequent new product introductions, shortened product life cycles, new industry standards, continuous product improvements, rapid technological changes, consumer price sensitivity and abundance of competitors. Each section is intense and staying on top of each is difficult for any company to manage. Those with considerable market share continue to battle to prevent relinquishing any while those with little push with the items above to take any amount of market share they can get.

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4.6.12 MARKET SIZE The PC market has spread into nearly 80% of U.S. households. A survey conducted by the Gartner Group predicts that global PC sales will increase to 187,000,000 units (13.9%) this year. This follows an 11% increase in 2003. Price declines have contributed to the robust growth (Fujikeizai, 2004). 4.6.13 INDUSTRIES' DOMINANT ECONOMIC FEATURES The versatility of the computer industry allows a few dominant economic features to stand out. The market size mentioned above is one of these dominant features. It has increased to a range between $890 million to $2 billion. The competitive rivalry is another dominant feature. The national and global levels are in the early maturity stage, which is nice considering that, the local and regional markets a completely saturated. A third dominant economic feature is the technological innovations that continually surface from the many competitors. Innovations such as software advancements, 32 bit and 64 bit chips, networking expansions, and improved design technologies. Each has a direct link to the economic structures of the company and its competitors. 4.6.14 DISTRIBUTION CHANNELS The distribution channels for PCs have been changing considerably in the past couple of years. The changes are being driven by price declines and the 'mature product' phase of the computer life cycle. Many of the expansions involve channels that already carry PCs or other sources not previously used. A few examples of those not previously used are cable TV firms, telephone companies, and bookstores. 4.6.15 COMPETITORS: STRONGEST - WEAKEST The focus on the strongest competitor extends beyond Microsoft but that will become clearer in a few sentences. Microsoft's control of the PC market speaks for itself so they can easily been seen as the strongest competitor. Apple will eventually have to tackle trying to take away market share but a head-on battle may not be the best approach (Machanick, 1998). Another side of competition is the music side that Apple is presently doing well in. Samsung and Napster 2.0 have teamed up to release a new service/hardware combination that is intended to compete directly with iTunes Music Store and iPod. The scheduled release is to offer unlimited 29

downloads and services that the iTunes Music Stores offer. The combined powerhouses present a formidable foe for Apple (SpyMac, 2003).

4.7

RIVALS ANTICIPATED STRATEGIC MOVES

Apple's strategy has not gone unnoticed. Its rivalry has created an air of 'bad blood' between itself and digital rival Real Networks. Apple management was quoted as stating: "We are stunned that Real Networks has adopted the tactics and ethics of a hacker to break into the iPod, and we are investigating the implications of their actions under the DMCA and other laws." The move has prompted Apple to consider restricting iPod software updates so that Real's Harmony technology would no longer be supported (Naraine, 2004). AOL is tight-lipped on how it intends to use ICQ, which they purchased in 1998. ICQ instant messaging users number to 235 million and Microsoft and AOL were warring over whether Microsoft messenger can access AOL messenger's user base. Apple teamed up with AOL on the messaging offsetting the battled strategic moves that Microsoft intended. The move was a very well planned strategic move for Apple. Speculation has surfaced that video conferencing functionality may be added to iChat (Geek.com, 2002). The move has been seen as being gutsy.

4.8

KEY SUCCESS FACTORS

4.8.1 TECHNOLOGY RELATED The iMac release in 1998 introduced the Unified hardware architecture which featured the new ROM. The first Macintosh computers were equipped with a physical chip on the logic board because RAM and HD space were costly and ROM contained routines required for computer startup and other higher-level Mac OS code. The iMac release divided ROM into boot ROM and Mac OS ROM. The startup and higher-level code routines were separated. The Mac OS ROM no longer needed to be in a chip form but instead is now an image file inside of the MacOS system folder. This change updates with the use of firmware feasible for both ROMs. Each Mac also had a unique machine identification number (Apple Museum, , 2004). Apple also offers a better-integrated computer operating system than its competitors. It is also not easily copied so Apple could offer a superior computing solution free of any troubled operating system. The GUI (graphic user interface) system design is better than anything that has been placed onto any Windows platform so Apple has continued to appeal to the creative and 30

professional graphics sector. Apple has put audio, print spooler, bridging, and Ethernet into one small package call AirPort Express. The system works with any Wi-Fi device and supports streaming music through analog and digital audio jacks and USB printer spooling through USB ports on Mac OS X and Windows XP and 2000. The introduction of AirPort Express raises the bar on these combined features (Technology updates.com, , 2004). 4.8.2 MANUFACTURING RELATED Apple subcontracts it's manufacturing to third parties so it can focus on its core competencies of testing and developing software. It can also concentrate on ensuring that what is manufactured meets required specifications so quality remains a top focus. Management can ensure that the computers meet customer's requirements by concentrating on their needs instead of fighting line production problems. 4.8.3 DISTRIBUTION RELATED Apple has always been a leader in the use of automated systems and the distribution phase is not any different. Apple operates some of its facilities round the clock and after manufacturing they are automatically feed to a system though a case taper where it is prioritized and sorted prior to being palletized. The FloStor system can divert the product for shipment or audit before it is released from the warehouse. Apple's use of this system minimizes the intervention and monitoring time cycles. It even has the capability of paging a maintenance mechanic when problems occur within the system (Flostor, , 2004). Apple not only contends with the physical distribution of its computers but it must also address distribution of its music and iTunes software products. The AirPort Express system is one of Apple's new methods of staying on top of the distribution of its innovations. 4.8.4 MARKETING RELATED Apple has created computers that are aesthetically pleasing when compared to PC and their clones. The company has also produced many great products but it continues to lose market share. Michael Hillmeyer, with Merrill Lynch, commented about Apple by stating that "A product differentiation strategy is difficult in a business increasingly commoditizing." He followed that with comments about the weak state of IT demand and the staleness of Apple product together with the higher costs were affecting financial forecasts (Wilcox, J., 2003). 31

4.9

APPLES FINANCIAL ANALYSIS

4.9.1 APPLES CURRENT FINANCIAL POSITION A closer look at the financial figures of Apple given by (Yahoo finance, , 2004) for the companys financial year ending September 2011 indicates that the company is in a very good financial position since the company had gross profit of $ 43,818,000 and a net income of $ 25,922,000.A closer look at Apples financial figures for the last few years shows that the companys financial performance has improved continuously since the year 2008. In the year 2008 the company had net sales of $ 37,491 million where as the year 2009 saw the companys net sales increase to $ 42, 925 million and $ 65,225 million in the year 2010. However, it is important to note that even though the companys liabilities have also been increasing throughout the years something that could in the long run prove to be a bad thing. In the year 2009, Apples liabilities were $ 15,861 million and increased in the year 2010 to $ 27,392 million. The increase in the liabilities can be attributed to Apples increase of its flagship stores. The table below shows Apples financial figures for the last four years as obtained from Apple (2012).
Year Revenues in Millions Net Income in Millions Retained Earnings in Millions Profit Margin percentage 2011 $108,249 $25,922 $62,841 25% 2010 $65,225 $14,013 $37,169 24% 2009 $42,905 $8,235 $23,353 21% 2008 $32,479 $4,834 $15,129 19%

Table 4 - Apple Financial Figures

Apple financial ratio analysis in comparison to Industry figures

Return on Price/ Total Assets Return on Quick Current Earning (ROA) Equity Ratio Ratio Ratio (PE) 27.14 41.79 1.35 1.61 22.4 22.3 29.5 1.24 1.58 16.07

APPLE INDUSTRY FIGURE

Table 5 - Apple financial Ratio

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From the figures contained in the table above, it is evident that Apples financial performance is improving over the years. The ROA ratio (Return on Assets) usually indicates after tax profit per dollar of each asset. Figures obtained from (Apple, 2012) indicated that the companys return on equity has consistently increased over the last four years implying that the income is consistent in comparison to the equity held by the stakeholders. As far as return on total assets is concerned, figures from (Apple, 2012) indicate that the company is in a strong position as the figures have consistently increased over the years with the ratio for 2009 been 12.24 where as the figures for 2010 were 21.74. The companys current ratio is as can be seen from the table is 1.61 which is actually above the industry ratio which is at 1.58. In terms of the quick ratio, Apples ratio is at 1.35 which implies that the company does not have to necessarily sell its inventory in order to meet its obligations. Apples two main competitors are HP (Hewlett Packard) and IMB (International Business Machine). When quick ratio is used to compare the two companies, Apple emerges the winner since the company has an average of 1.6 over the last five years where as HP has 1.01 and IBM have 1.21. On the other hand, when Return on Equity is used to compare the performance of the three competing companies, Apple comes second as IBM has 41.79 and HP 19.31 while Apple has 27.14. As far as return on capital in used, Apple again takes the lead over the two companies since it has 27.14 while IBM has 13.62 and HP 5.46. Thus while comparing Apples performance with its main competitors, Apple can be argued to be doing quite well in many fronts.

4.10

OUTSOURCING IN CHINA

4.10.1 LABOR RIGHTS ON THE RISE China, the worlds second largest outsourcing market, has gone from an agricultural to an industrial economy in a fraction of the time it took the West. And now, Chinas economy is rapidly developing service industries. Every country that has gone from agriculture to industry has had to deal with labor issues along the way. Tight political control by China's leaders has not helped labor unions flourish, and conflicts have been popping up for years. Just after Apple released its latest iPhone, the Chinese company that manufactures these phones has a riot. Chinas vast labor force is learning how to flex its muscle, and outsourcing is entering an age of labor issues. The rise of industry in China has brought with it the same sort of industrial 33

accidents that the US and the UK experienced one hundred years ago. China and other off shoring countries are following the same learning curve that America (and England, and France, etc.) followed. These countries are just beginning to head into a difficult time. However, countries like China have been cheap, but not very productive. Although the cost of labor is much lower in China, as of 2010 a Chinese worker was only 27% as productive as an American worker. The battle for greater worker productivity will drive labor unrest. And thats whats been happening over at Foxconn. The recent riot and subsequent factory shutdown resulted from a fight between workers. Previously, there were large-scale wage disputes and even questions about unpaid students forced to work on the iPhone assembly line. The issues are a bit different than what the US faced, but the big theme is the same: Workers want better wages and better work conditions. Will Chinese workers choose union to represent them or in a world of social media will they find a different way to represent themselves? One of the big differences between US and Chinese labor history is that consumers in other countries are watching how the government and the factory owners are treating their workers. Apple has let Foxconn know that they are not happy about working conditions and are considering on shoring options. he history of labor has been the history of confrontation between owners and workers. The top outsourcing locations in the world are now going through their workers rights phase, as their economies move from farming to factories.

4.11

DANGER OF OUTSOURCING

Often, companies have an abundance of information but a lack of knowledge. Part of the process of converting information into knowledge is to assess risks. Unfortunately, many companies fail to fully recognize these risks. A summary of commonly underestimated dangers of outsourcing are noted. Overemphasis on low labor wages without proper visibility to other tangible and intangible costs. These costs are often missed because: They are not allocated to product costs: Often costs are paid for by the corporation from various budgets. For example: quality inspection, supplier management, customs compliance, and others. 34

They are difficult to quantify: Expedited shipments, supplier management (on-site and remote), suppler development and problem resolution. They are not visible: Local taxation, labor turnover, hidden compensation, compliance with human rights and ethical standards. They are overlooked and/or underestimated: Higher utility costs, cost for skilled maintenance, learning curve, training, higher quality control, and regulatory compliance such as customs compliance.

DANGER #2: Looking only to outsourcing for cost reduction while underestimating the value to be gained in product design. Focusing on the cost reduction of individual parts may obscure the cost reductions from the entire product design. Often, these savings require a structured discipline like DFMA to become visible because The labor cost component may not be significant Logistics and customs costs may eliminate the labor cost savings Elimination of wasted material, requiring close control of the manufacturing process may prove elusive at off-shore facilities. DANGER #3: Assuming the internal resources needed to manage the off-shore supplier exist: Companies, like Apple, have found it necessary to devote significant resources to develop, train, control, and monitor off-shore suppliers. Poor communication and lack of proper governance are frequently cited reasons for outsourcing failures. Failing to understand the effort needed to understand local customs often results in frustrations and performance failures. DANGER #4: Forgetting that some products, whether or not they are redesigned, are not a good fit for offshore manufacturing. For example: Products using a highly automated process may not show significant cost savings when produced off-shore. Product weight and size can make shipping by either air or sea excessively expensive.

35

Products that require scheduling flexibility are poor candidates. Four to six weeks for sea shipments is not viable. Products that undergo revisions increase the likelihood of quality failures. Often, inventory must be reworked when it arrives. Products that require precision equipment may find depreciation cost is the same worldwide or the equipment used is inferior.

DANGER #5: Unaccounted for risk. While risk is not the reason to abandon a project, it should be well understood so that mitigation strategies can be put in place. Some of these risks include: Complying with complicated and ever-changing customs regulations require specialists to avoid fines and penalties. Geographic risk from natural disasters that require an expense contingency plan be maintained. Logistical risk including fuel cost, availability of port facilities, port clearing time, losses in transportation. Inadequate infrastructure leading to delays and quality issues. Lack of skilled workers. Or, skilled works may be at a premium to U.S. costs. Cost of onsite support by U.S. staff. Judicial, political and cultural instability. Loss of intellectual property to competitors. Use of physical assets to subsidize competitors products.

DANGER #6: Overlooking fundamental facts: Through redesign, part count and material weight can be reduced to eliminate material, labor, and overhead costs. Total cost of ownership associated with offshore manufacturing always contains obscured and hidden costs. Low ethical standards at off-shore operations place consumers, employees, and ultimately, a company at risk of injury and financial loss.

36

4.12

LEGAL

4.12.1 INDUSTRIAL ESPIONAGE LAWS

China's laws on industrial espionage provide authorities wide discretion in deciding who to charge with espionage. Often, economic and industrial data is considered to be state secrets. Without expert advice and close cooperation with the government, unwittingly violating these laws is possible. In 2009, Executives of the Brazilian iron ore giant, Rio Tinto, were arrested by Chinese authorities during negotiations over iron ore sale contracts. In addition to higher ore prices, the Chinese government had complained about Rio's decision to abandon a $19.5 billion deal with Chinalco, the Chinese state-owned metals group, in favor of a deal with one of its longtime competitors.

4.12.2 COMPLIANCE WITH LABOR LAWS

China has many laws governing the treatment of workers, such as minimum-wage laws and laws governing overtime and overtime pay. As some companies have found, these laws are often ignored. U.S. manufacturers can be held legally responsible for these violations in their supply chain. The court of public opinion can also convict companies for these unethical working conditions.

4.12.3 ENFORCEABILITY OF CONTRACTS

Many portions of US contracts are not enforceable outside the US. For example, a non-compete clause may do nothing to stop a supplier from using a companys tooling and equipment to develop competing products. In China, contracts should be written in Chinese, because the Chinese Contract Controls the relationship. It does not matter what the English version says. One cannot stress enough the difficulty in translating contracts into Chinese. It requires recognized Chinese legal experts who speak and write Chinese at a native level to properly construct a viable contract with a Chinese supplier. Even then, enforcement may still be an issue. Protection of Intellectual Property Protection of intellectual property is weak to non-existent Even though China has joined the WTO and agrees to abide by all the legal world organizational rules, in reality, many laws are violated. Copyright laws, in particular, are not enforced, and piracy of trademarked and copyrighted goods is ubiquitous. Many companies will not produce their

37

product in Asia because they cannot protect the proprietary, patent, or intellectual properties of a product or its manufacturing process.

PROPOSED PLAN OF ACTION

The principal proposition of this paper is that implementing a successful outsourcing strategy for Apple Inc and the process must involve an analysis of a number of dimensions including relative capability in the process, contribution of the process to competitive advantage and the potential for opportunism from outsourcing the process. Analyzing each of these dimensions will provide Apple Inc with a number of sourcing strategies. The relationship between each of these dimensions and these sourcing strategies is explained below.

5.1

UNDERSTAND BUSINESS THEMES AND DRIVERS

Developing an operational case that takes a look at current processes and describes the changes that will take them to the desired to be state is an important part of aligning the outsourcing strategy with Apple Inc business goals. Understanding both the business themes and the business drivers is essential to developing an outsourcing solution that is aligned to the business strategy.

5.2

RETURN ON INVESTMENT (ROI)

Apple Inc should delineate both the desired state of the process after outsourcing and the expected business benefits that will result. Ideally, it should quantify these benefits in the form of an expected return on investment (ROI), taking into account increased revenues and cost savings, as well as the costs involved paying particular attention to hidden costs. The costs beyond the actual contract costs can be substantial. Severance costs can add 3% to 5% to project costs, the additional complexity in offshore contracts can add 6% to 10%, and initial software development can add from 1% to 10%.

5.3

VENDOR SELECTION

In order to succeed, Apple Inc must select the right vendor for their needs right from the start. This is another area where companies tend to shortcut the process, and in so doing, leave significant value unrealized. This tendency was clearly reflected in the survey results.

38

Chart Title
60% 50% 40% 30% 20% 10% 0% Axis Title

Define realistic service level that align with business goals 49%

Develop Define and plan and Align staff for business service and goals contract without manageme outsourcing nt 39% 37%

Spend more time on vendor selection and evaluation 35%

Use an experience d 3rd Party advisor

Compare Outsourced costs of sooner outsourcing Vs in-house

Series1

23%

22%

20%

Figure 3 - Vendor Selection chart

5.4

PERSONAL MOTIVATIONS OFTEN DRIVE THE PROCESS

Careful selection of the employees who participate in the evaluation process is critical. Apple Inc should not underestimate the potential desire of current staff to prefer less qualified service providers for personal reasons. Its also important to keep senior management involved. While more senior-level executives tend to design the outsourcing strategy, mid-level managers often create the RFP and evaluate the service providers.

5.5

COLLABORATION, FLEXIBILITY AND TIME REQUIRED FROM

BOTH SIDES
The service providers and Apple Inc may well need to go through several iterations of proposed plans. As service providers gain more data and insight into the operation, they will usually revise their cost estimates, recommended solutions, and expected results. Based on what it learns from these discussions, Apple Inc can refine its requirements and expectations.

5.6

STRIKING THE DEAL

Continued involvement by senior executives of Apple Inc in the contracting process is important to guard against having the procurement department narrow the focus exclusively to costoriented, transactional issues - or having legal counsel develop a dry, complicated document that 39

overrides the intended spirit of the service provider/company relationship. An effective outsourcing contract should accurately reflect the strategic goals that have been established for the initiative and clearly define expectations - for both the vendor and Apple Inc, encompassing both the pre-transition and the post-transition environments.

5.7

THE PRICING QUESTION

The contract should clearly delineate the pricing for two types of activities: those required to maintain the baseline of service levels in the operation and those required to enhance services or products which would justify additional charges. Minimizing costs is generally a concern however, Apple Inc should maintain their focus on driving business value by leveraging outsourcing to achieve their companys strategic objectives.

5.8

SIGNING THE DEAL AND PERFORMANCE MONITORING

Apple Inc still question whether theyre getting what they paid for. Among all the executives surveyed, roughly two-thirds reported experiencing problems that had to be escalated to the level of senior management over the past year. Communications-related issues, particularly reporting and transparency, were some of the most commonly cited challenges.

5.9

FROM OUTSOURCING TO COMPETITIVE ADVANTAGE

All outsourcing deals are to some extent transformational in nature and are built on trust and two-way communication. Some affect daily operations, while others affect the strategic direction of the organization. The evolution of the outsourcing market is leading to a new approach that emphasis this transformative aspect whereby Apple Inc is looking for ways to gain competitive advantage in the face of greater global competitive pressures.

5.10

MANAGING THE RELATIONSHIP

Managing the service provider relationship and monitoring performance is a full-time commitment. Apple Inc need to invest in the service provider management function with the appropriate people and relationship management skills, along with legal, financial, and planning skills. Finding executives with this set of skills is not easy. In many cases, it will be necessary to recruit aggressively to fill these senior positions, either within or outside the organization.

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5.11

MONITORING PERFORMANCE

A critical component of performance management is Service Level Management (SLM) - the monitoring of compliance to service levels specified in the contract, and reporting on the performance of the outsourced activity. SLM should be based on a holistic view of the relationship, looking at SLAs, costs, quality, and other factors to present a single view of service provider performance. These factors should be clearly understood by Apple Inc and other parties. When performance is not adequate, Apple Inc and the service provider should work cooperatively to identify and remedy the cause of the problem. It is also important to remember that problems in an outsourcing initiative are not always the service providers fault. Often, Apple Inc should shares some or all of the responsibility for inaccurate information or poor management.

5.12

GOVERNANCE

Governance structures and processes give Apple Inc and the service provider a mechanism both to manage daily operations and also to deal with the unpredictable issues and changing business realities that inevitably arise. Strong governance allows Apple Inc to ensure that the service providers operations remain well aligned with the companys outsourcing strategy. Governance structures should be established at three levels: Executive committee - to review service provider evaluations, review critical issues, and resolve important service provider management issues. Programme management team - to review critical status reports on progress and to review reports on the financial impact of the initiative. Service delivery management team - to monitor status of the initiative and compliance with the SLAs.

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CONCLUSION

Strategic outsourcing involves separating out some of a companys value creation activities within a business and letting them be performed by an independent entity. Indeed, Apple has outsourced various functions in terms of manufacturing, assembly and logistics as its contract manufacturers and outsourcing companies can perform several value-creation functions at a lower cost due to low-cost location and other competitive advantages. We are living in a globalized economy in which overhead and production costs are the single most important financial factor that can determine a products success or failure. Apple

produces most of its products such as iPods, iPod minis and iPhone in China, thus ensuring a very low production cost and an increased US market attractiveness. The single most important reason for outsourcing iPod and iPhone production to China is that the manufacturing costs are significantly lower than what it would cost to assemble in the United States or Europe. As Apples focus lies in the design of its products and its strength can be seen in the fields of innovation, creativity, and marketing, it makes sense that the company focuses on these value creation functions and outsources its manufacturing activity to contract manufacturers that specialize in this function. Therefore, Apple can reap benefits in terms of a lower cost structure, opportunities to differentiate its products, and increased focus on its distinctive competencies. Nevertheless, it has to be stated that the company bears risks with regard to holdup due to the dependence on it outsourcing partners as well as loss of control and information. One of the success reasons of Apple products is the outsourcing of application development. As a result of outsourced application development, application developers, who build different apps for different platforms and there are plethora of applications available.

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7
1. Age?

QUESTIONNAIRE

18-21 22-25 26-30 31-35 36-40 40+

2. Gender? Male Female

3. Status? Single Married In a relationship

4. Occupation? 43

Student Employed Unemployed Other (please specify)

5. What is your yearly income? 0-10,000 11,000-20,000 21,000-30,000 31,000-40,000 41,000-50,000 50,000+

2. Shopping for technology Your experiences and thoughts on purchasing technology. 1. When shopping for new technology products, which brands do you prefer? Apple LG Toshiba Samsung

44

Sony Other (please specify)

Phillips

2. How willing are you to pay more for higher branded products? Very unlikely Unlikely Neither likely/unlikely Likely Very likely

3. When buying new technology products, how important are the following attributes? Very Significant Significant Quality Packaging Price Popularity Availability 3. Purchasing Apple technology Your experiences and thoughts on purchasing Apple technology. 1. Do you own any products from Apple? Yes No Insignificant Very Insignificant

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2. If so, which of the following do you own? iPod iPad iPhone Other (please specify) iMac Macbook Apple Mac

3. How many Apple products do you own? 1 2 3 4 5 6+

4. Would you say that you are a collector of Apple products? Yes No

5. Roughly with each purchase from Appple, how much are you likely to spend per item? 10-50 300-500

46

50-100 100-200 200-300

500-1000 1000+

6. When buying products from Apple do you prefer the adaptation of their current brand ideas or thier new innovation e.g. Apple Mac (adaptation) and iPad (Innovation)? Adaptation Innovation Both

7. Do you update your Apple products to the new Innovation models? Yes No If Yes, why? *

8. Do you believe there is a certain esteem or reputation attached to owning products from Apple? (Please specify below)

47

9. Do you think that your Apple products satisfy your needs as an individual? Yes No

10. In your opinion do you believe that Apple Inc's products provide you with value for money? Yes No

11. Apple Inc define realistic service level that align with business goals Yes No

12. Apple Inc define and Align business goals without outsourcing Yes No

13. Apple Inc develop plan and staff for service and contract management Yes

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No

14. Apple Inc spend more time on vendor selection and evaluation Yes No

15. Apple Inc use an experienced 3rd Party advisor Outsourced sooner Yes No

16. Apple Inc compare costs of outsourcing Vs in-house Yes No

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