MGT 202 PROJECT

ECONOMICS FOR ENGINEERS

APPLE MANAGEMENT
Faculty : Maria Evelyn Jucunda

GROUP MEMBERS:
1. ARVIND BHASKARAN 13BME1050
2. A.KISHOR BABU 13BCE1026
3. Y.VEDAVYAS REDDY 13BME1192
4.DHANUMJAYA.D 13BME1071
5.KUSHAl PS 13BME1092
INTRODUCTION:

• Apple Inc. is an American multinational technology company headquartered in Cupertino, California,

that designs, develops, and sells consumer electronics, computer software, and online services.
• Its hardware products include the iPhone smartphone, the tablet computer, the Mac personal
computer, the iPod portable media player, and the Apple Watch smart watch.
• Apple's consumer software includes the OS X and operating systems, the iTunes media player,
the Safari web browser, and the iLife and iWork creativity and productivity suites.
• Its online services include the iTunes Store, the App store and Mac App Store, and icloud.
• Apple was founded by Steve Jobs, Steve Wozniak, and Ronald Wayne on April 1, 1976, to develop and
sell personal computers.
• It was incorporated as Apple Computer, Inc. on January 3, 1977, and was renamed as Apple Inc. on
January 9, 2007, to reflect its shifted focus toward consumer electronics.
• Apple (NASDAQ: AAPL) joined the Dow Jones Industrial Average on March 19, 2015
• Apple is the world's largest information technology company by revenue, the world's largest
technology company by total assets and the world's second-largest mobile phone manufacturer. In
November 2014, in addition to being the largest publicly traded corporation in the world by market
capitalization, Apple became the first U.S. company to be valued at over US$700 billion.
• The company employs 115,000 permanent full-time employees as of July 2015 and maintains
475 retail stores in seventeen countries as of March 2016.
• It operates the online Apple Store and iTunes Store, the latter of which is the world's largest music
retailer.
• There are over one billion actively used Apple products worldwide as of March 2016.
• Apple's worldwide annual revenue totaled $233 billion for the fiscal year ending in September 2015.
• To put this into perspective this revenue generation accounts for approximately 1.25% of the
total United States GDP.
• The company enjoys a high level of brand loyalty and, according to the 2014 edition of
the Interbrand Best Global Brands report, is the world's most valuable brand with a valuation of
$118.9 billion.
• By the end of 2014, the corporation continued to receive significant criticism regarding the labor
practices of its contractors and its environmental and business practices, including the origins of
source materials.
Apple Inc. Organizational Structure: Features, Pros &
Cons
• Apple’s organizational structure is one of the factors contributing to the company’s successful
innovation.
• A firm’s organizational structure can create opportunities for business growth. However, it can also
impose limits on how the firm develops.
• In Apple’s case, the organizational structure is mainly a traditional hierarchy, with some key elements
from other types of organizational structure.
• The success of the company is linked to innovation and the leadership of Steve Jobs, but its
organizational structure is partly responsible for ensuring support for such leadership.
• Now, under Tim Cook’s leadership, Apple has made some small changes in its organizational structure
to suit market and industry demands.
• Apple’s organizational structure is effective in supporting business performance to ensure leadership
in the industry.
• However, further changes in this organizational structure can help improve Apple’s capabilities,
especially in the area of rapid and creative innovation and design.
Features of Apple’s Organizational Structure

• Apple’s organizational structure enables the firm to continue innovating rapidly.

• The creation of new products like Apple Watch is linked to the support from the firm’s
organizational structure.
• The following are the most significant characteristics of Apple’s organizational structure:
• Spoke-and-wheel hierarchy
• Function-based grouping
• Product-based grouping
Spoke-and-Wheel Hierarchy.
• A bird’s-eye view of Apple’s organizational structure shows considerable hierarchy.
• In the past, everything went through Steve Jobs’ office.
• Jobs made all the major decisions. However, under Tim Cook’s leadership, this hierarchy in Apple’s
organizational structure has slightly changed.
• There is now more collaboration among different parts of the company, such as software teams and
hardware teams.
• Apple’s vice presidents have more autonomy, which was almost absent under Jobs.
• Thus, the company’s organizational structure is now less stiff, but still has a spoke-and-wheel hierarchy
where Tim Cook is at the center.
Function-Based Grouping.
• The upper tier of Apple’s organizational structure has function-based grouping, which is an element
derived from the functional type of organizational structure.
• Each senior vice president who reports to Tim Cook handles a business function.
•
• For example, Apple has an SVP for industrial design, an SVP for marketing, and another SVP for retail.
• In this aspect of the organizational structure, Apple’s top leaders address business needs in terms of
function areas.
Product-Based Grouping.
• The lower tier of Apple’s organizational structure has product-based grouping, which is an element
derived from the divisional type of organizational structure.
• Below the senior vice presidents, there are many vice presidents for different outputs or products.
• For example, Apple has a VP for iOS apps, a VP for iPad, and another VP for consumer apps.
• This aspect of the organizational structure enables Apple to address specific products or product
components.
Advantages & Disadvantages of Apple’s Organizational Structure

Strong Control.

• The hierarchy in Apple’s organizational structure supports strong control over the organization.

• Theoretically, hierarchy empowers top leaders like Tim Cook to control everything that goes on in the organization.

• Through the hierarchy, function-based grouping and product-based grouping in this organizational structure, Apple
ensures that Cook and the senior VPs control all organizational processes
Limited Flexibility.

• Apple’s organizational structure has the downside of low flexibility.

• Hierarchy typically prevents lower levels of the structure to flexibly respond to business needs and
market demands.
• However, Tim Cook has already made slight improvements by increasing collaboration among
different parts of the firm.
• Still, Apple’s organizational structure does not support rapid changes because everything must go
through Tim Cook and the senior VPs.
Company Overview

• Apple Computer, Inc., is an American multinational corporation with a focus on designing and manufacturing consumer
electronics and closely related software products
• As of September 2015, the company operates 475 retail stores in the United States, and more in the United Kingdom,
Japan, Canada, and Italy
• For a variety of reasons, ranging from its philosophy of comprehensive aesthetic design to their advertising campaigns,
Apple has engendered a distinct reputation in the consumer electronics industry and has cultivated a customer base
that is unusually devoted to the company and its brand, particularly in the United States.
• The company's best-known products include the Macintosh line of computers, the iPod, the iPhone and the iPad.
• Its software includes the OS X & iOS operating system; the iTunes media browser; the iLife & iWork creativity and
production suites.
• Fortune magazine named Apple the most admired company in the United States in 2008, and in the world from 2008
to 2012
Key Statistics

• Current Price $105.97

• Market Capitalization 514.67 Billion
• P/E 15.71
• EPS 35.14
• P.E.G. 0.66
• R.O.A 24.01%
• R.O.E 45.58%
• Average 5 year Gross Margin of 40%

• As of March 2016, the company operates 475 retail stores in 17 countries, and an online store where
hardware and software products are sold.

• It is the largest publicly-traded corporation in the world by market capitalization, with an estimated value
of US$800 billion as of February 2013.
• It is furthermore the largest technology company in the world by revenue and profit, earning more than
Google and Microsoft combined.
• Source: "Apple's $56 billion sales set new tech record". CNN. January 24, 2015.
• “We’re armed with the strongest product line in our history, the most talented employees and the best
customers in our industry & $25 billion of cash safely in the bank with zero debt.”
- Sir Steve Jobs
Committees

Apple's board of directors has three committees:

 The Audit and Finance committee members are Ronald D. Sugar, Ph.D. (Chairperson), Robert A. Iger,
and Arthur D. Levinson, Ph.D.
 The Compensation committee members are Andrea Jung (Chairperson), William V. Campbell, Millard
S. Drexler, and Albert Gore, Jr.
 The Nominating and Corporate Governance committee members are William V. Campbell
(Chairperson), Millard S. Drexler, and Albert Gore, Jr.

Internal Assessment
• Operational Focus - Willing to release incomplete products
• Wall Street - Engaging to increase dividends
• Shifting Values - MBA vs. Liberal Arts
• Relaxed Atmosphere - Leadership quiet yet demanding
• Highly Ethical ?- Some might question
• Procurement
• Vendors
• Foxconn
• Product Quality
• Privacy
• Sustainability
• Intellectual Property Theft
• Patents

• The company designs, manufactures &

markets
• Personal computers
• Mobile communication devices
• Portable digital music player
• Software
• Tablets
• Digital watches
 PRODUCTS

• iPhone

• iPad

• Mac Hardware Products

– Desktop computers: iMac, Mac Pro and Mac mini

– Portable computers: MacBook Pro and MacBook Air

• iPod

– Touch; Nano; Shuffle; Classic

• iTunes + iTunes Store

• Mac App Store

• Software Products and Computer Technologies

• iCloud

• Upcoming:

– iTV

– iGame Counsel

Legal\Regulatory Hurdles
• Apple currently has 3.5 Billion Intangible Assets
– Typically are patents and copyrights
– Very active in filing patents on new products
– Literally everything they make
– They also peruse legal action
• Apple is very secretive and protects its products
• Industry Analysis
• Consumer Electronics Industry is very competitive
• Products can be looked at as a luxury and not a necessity.
• Demand is driven by the “desire” of the product not the “need”
• Demand for Apple products is expected to continue to grow rapidly
• Not one company in the Technology industry competes with Apple in all business segments.
• We took the market capitalization of all the industries of Apple’s competitors and compared
Apple’s Market Cap. It seems that Apple clearly dominates.
• Will have to get permission because it will exceed the limit of 2.5% of initial position.
Key Risk Factors
• Global Economic Conditions
• Highly competitive global market subject to rapid technological change
– “Wide Moat”
• Must successfully manage frequent product introductions and transitions
• Operating results depend on Apple’s ability to obtain components in sufficient quantity
• Depend on outsourcing, many outside the U.S.
• Relies on third-party intellectual property and digital content
• Apple outsources all of its production
– Because it can get it at a very low cost overseas.

Business Analysis-Macro Economy

• The state of global economy & the state of the overall stock market.
• Sales could significantly slow down after 2016 without new revolutionary products.
• Sales growth is already slowing and we might see first quarter of significant EPS decline for March
2013.

• The impact of slowing economy on AAPL

– products
• Products sold at premium price would suffer
• Some purchases will be postponed, but not discarded
• Innovative products at its early life cycle will still grow
– Financial strength
• A strong balance sheet with enough cash is an important competitive advantage
 Business Analysis-The Products
• Overview: Segments, size, market share and growth.
– Mac (hardware and software): 14M units ,4% PC share; 30+% growth, 3 times industry average.
Down to single digits during recession. Rebounded to 32% growth in 2010.
– iPod (also iTune, and accessories): 50M units, 70% US market, negative growth. Down 7% June09 Q ,
first decline since introduction. Will decline at 10% rate
– iPhone: 10M + units 2008, 20M 2009, 40M 2010. huge growth potential, might reach 100M in
2013, and 150M 2015. The King of the iEmpire.
– iPad: 10M first year of introduction, 20M 2011, 50M 2015. The addressable market is big in absolute
size 150million users, 3.2 Million sold in June Q, Pending demand is high as Production cannot meet
demand
 Business Analysis-iPhone
• The iPhone-competition
– Competition: Is the “Storm” coming? Is it time for “Dream”?
– New Entry:
• Traditional phone makers
• Smart phone only makers
• New comers: Samsung, Sony, HTC, Motorola, Nokia
• PC guys: Dell, HP, Lenovo, Acer
– Create and continue dominance like iPod? Or fade away like Mac before
– Possible outcomes of smart phone industry
– Possible outcomes of smart phone industry
• Co-existence of several major brands, hardware and platforms
• A dominant player (winner takes all)
• A universal operating platform ( Google, WinMobile)
– Strategic Strength
– Software and applications: smart phones will be software centered
– Hardware: a fashion statement
– PC expertise: the phone feature is less important, and the computer features are the differentiator
– The App store and iTune
– The brand
– The customer loyalty: the highest among competitors, always
– The focus and economy of scale
Iphone Quarterly Sales in millions
Iphone Sales by Product Categeory
Apple’s Competitors
 The Risk
• Competition: AAPL is not Microsoft at any fronts it competes.
– Enemies:
• Enemy number 1: Google. Competes with AAPL on mobile OS, Tablets, internet TV, and possibly music.
• Enemy number 2: Microsoft
• Smart phone family: HTC, Samsung, Sony, RIMM, Motorola, Nokia.
– Price and margin pressure
• Leadership
– Tim is a great operator, coordinator, manager, but not a “product person”, not a “marketing genius”, not a visionary
– Power struggle within and Apple might lose talent
– Lack of ultimate authority to do the “right” but unpopular thing
• Disruptive technology: Web-based app and html5
• Double Recession: slower growth of high end products
• Regulation: not a big concern as Software or interest, but a growing concern
• Quality issue, product failure
– iPhone5 Map gate
– Antenna gate for iPhone4.
• Labor issues: Apple face negative publicity for the unfriendly working conditions and low pay of its supply
chains. Labor cost will rise sharply and might lower gross margin.
• Relations with carrier and subsidies. Once carriers decide to cut subsidy significantly, Apple might lose
volume, ASP and margin same time, cause a decline of profit
• Tax: Tax of cash parked in foreign subsidiary when they are repatriated to US ultimately. Apple might not
only need to pay US tax on these cash, but its effective tax rate on future earnings would eventually rise to
30% + level, lowering its earning power significantly.
• Too big: AAPL has a market cap higher than Soft, and the only direction from top is going down.
• Valuation: Current valuation is still high, compared with Soft and Intc.
• Android: Competition like Android is catching up
• Margin: Margin might collapse because of competition
– Growth: Growth will slow down. Rule of big numbers.
– Lawsuit: patent lawsuit banned it from delivering smart phones.
– Brand : The brand might be diluted when Apple lower prices and go mainstream.
In PC & OS segment
• Microsoft
– Controls about 94% of Operating Systems
– Makes products that last a long time, although not “hip”
– OS is compatible with everything
• Hewlett-Packard
– Top competitor in PC sales
– Controls large segment of business market
– Does not offer other products other than PCs and accessories
• Dell
– Weakest competitor of top 3

– Provides computers for businesses, schools

– Behind HP in PC sales

– Does not offer other products other than PCs and accessories

Graham-Greenblatt

• 1 year Earnings Growth = 35.17%

• Graham

– 7-10 year growth 347%

– Greenblatt

– APPL=353.7%

– GOOG=46.37%

– RIMM=148.26%

– HPQ=81.81%

– DELL=42.19%
 Greenblatt Methodology
• Establish a minimum market capitalization (usually greater than $50 million).
• Exclude utility and financial stocks.
• Exclude foreign companies (American Depositary Receipts).
• Determine company's earnings yield = EBIT / enterprise value.
• Determine company's return on capital = EBIT / (net fixed assets + working capital).
• Rank all companies above chosen market capitalization by highest earnings yield and highest return on
capital (ranked as percentages).
• Invest in 20–30 highest ranked companies, accumulating 2–3 positions per month over a 12-month
period.
• Re-balance portfolio once per year, selling losers one week before the year-mark and winners one week
after the year mark.
• Continue over a long-term (5–10+ year) period.
The Graham formula

V: Intrinsic Value

EPS: the company’s last 12-month earnings per share

8.5: the constant represents the appropriate P-E ratio for a no-growth company as proposed by Graham

g: the company’s long-term (five years) earnings growth estimate

4.4: the average yield of high-grade corporate bonds in 1962, when this model was introduced

Y: the current yield on 20 year AAA corporate bonds

Change is Inevitable?
LEADING INDICATORS
&
DEMAND DRIVERS
Demand as a F(x) of leading indicators

• D = f(li1, li2, li3, …, lin)

•Market Share: Stable

•Search trends as an early indicator: Who has it?
•Networking effect
Sharing
Social Nets  Social Networking capabilities
• Mobile browser counter as a leading indicator ?
 EXTERNALITIES
Smart Phones: Competitors
 Value Chain & Business Model

Key Success Factors

•App developers
•Effective Designers • Design
•Infrastructure
•Talent (Well • Miniaturization
R&D,
trained workforce) IP iPhone • Security
•Apple University
•$$$$$$$$$$$$$$$ iPad
iCool • Ease of Use
•Manufacturing, Design
Suppliers, Partners Patents • Reliability
Manufact
(100+) uring • Marketing
INDUSTRY GROWTH & MARKET SHARE
Smart Phones: 71% CAGR for the next 4 yrs.
Cloud computing: 20% CAGR
Mobile dev. in general: 25%
Smart Phone: Market share growth
The mobile worldwide market in 2016
iPhone Mobile market share 2016
External Scanning Analysis
Porter’s Five Forces
Apple’s Sustainable Product Differentiation

Cost of Apple Product

Apple Pursues Niche
Barrier to Entry -
Threat of Rivalry – Market
Threat of Substitutes – Differentiation Strategy –
Threat of Suppliers – Defensive
Threat of Buyers -
Pass Cost on to Customers
Oligopoly Market (Niche)
Competitive Analysis - Porter
TOWS Matrix: Strengths/Opportunities
TOWS Matrix: Strengths/Threats
TOWS Matrix: Weaknesses/Opportunities
TOWS Matrix: Weaknesses/Threats
Relative sales growth rate: g = 100(Sn - S(n-1) ) /Sn-1
 Flush with Cash: Lets do
Backward and Forward
Integration

Backward Integration: Purchase of carriers

•i.e. Nortel Networks (Done!)
•WiMAX?
•Cable or others with a market cap of 100B?
Forward Integration:
•Kiosks
•Service Providers