S. W. O. T Analysis- Apple Inc. Eleanor Arlook DMP- Thursday 6:30-9:20 SWOT ANALYSIS Apple designs, manufactures and markets personal computers and related software, portable digital music players, and related accessories. The company markets third party audio and video products, and provides related services. The company has a strong brand image, which enables it to command a premium price for its products, giving it an edge over regional as well as other global competitors. However, intense competition threatens to erode the market share of the company.
Strengths Strong brand image The Apple brand is well recognized amongst most consumers. Apple also enjoys a high level of brand awareness and brand recognition for its products in all its markets. The company’s brand value, as per the Interbrand rankings, has improved from 39 in 2006, 35 in 2007 to 24 in 2008. The brand value of the company improved to $13,724 million in 2008 from $11,037 million in 2007. Apple leverages its brand image to differentiate its product offering and drive sales.
The company’s strong brand enables it to command a premium pricing for its products such as iMac, iPod and iPhone, giving it an edge over regional as well as other global competitors such as Sony. Robust financial performance Apple reported robust financial performance in the past few years. The company’s total revenue increased from $6,207 million in FY2003 to $32,479 million in FY2008, representing a compounded annual growth rate (CAGR) of 39%. The company’s operating income recovered from an operating loss of $1 million in FY2003 to an operating profit of $6,275 million in FY2008.
As a result, the company operating profit margin has improved from 3. 9% in 2004 to 19. 3% in FY2008. Apple’s net income increased from $69 million in 2003 to $4,834 million in 2008. Following the trend, Apples net income margin improved from 1. 1% in FY2003 to 14. 8% in FY2007. The net sales increased around 35% in 2008 as a result of increased sales of Mac, iPods, iPhone, other music related products and services, peripherals and other hardware, and software, service, and other.
The net sales of Mac, iPods, other music related products and services, peripherals and other hardware, and software, service, and other increased by 38%, 10%, 34%, 32%, and 46% respectively in FY2008. Net sales of iPhone and related products and services were $1. 8 billion for 2008, with iPhone handset unit sales totaling 11. 6 million. The company’s cash from operating activities reached $9,596 million in FY2008, as compared to $289 million in FY2003. Strong growth in revenues and cash flows indicates better financial position of the company and helps it to strengthen investor confidence.
Focus on research and development Apple has a strong focus on research and development as continual investment in research and development is critical to the development and enhancement of innovative products and technologies. In addition to evolving its personal computers and related solutions, the company continues to capitalize on the convergence of the personal computer, digital consumer electronics and mobile communications by creating and refining innovations, such as the iPod, iPhone, iTunes Store, and Apple TV. The company’s research and development expenditures were $1. billion, $782 million, and $712 million in 2008, 2007, and 2006, respectively. The company’s R&D spending is focused on further developing its existing Mac line of personal computers, its operating system, application software, iPhone and iPods; developing new digital lifestyle consumer and professional software applications; and investing in new product areas and technologies. In January 2009, Apple introduced the new 17-inch MacBook Pro featuring a new built-in battery that delivers up to eight hours of use and up to 1,000 recharges for more than three times the lifespan of conventional notebook batteries.
In the same month, Apple introduced iWork ’09, the latest version of Apple’s office productivity suite and iLife ’09, which features major upgrades to iPhoto, iMovie and GarageBand, and includes iDVD and an updated version of iWeb. Strong focus research and development would lead to market leading and innovative products such as iPod and iPhone, thereby enhancing the brand image of the company. Weaknesses Product recalls The company’s products and services experience quality problems from time to time. Apple sells highly complex hardware and software products and services that can contain defects in design and manufacture.
Defects may also occur in components and products the company purchases from third parties. There can be no assurance the company will be able to detect and fix all defects in the hardware, software and services it sells. For instance, in September 2008, Apple announced Ultracompact USB Adapter Exchange Program. Under certain conditions, the new ultracompact Apple USB power adapter’s metal prongs broke off and remained in a power outlet, creating the risk of electric shock. Therefore, the company decided to exchange every ultracompact power adapter for a new redesigned adapter, free of charge.
Product defects could result in harm to reputation and significant warranty and other expenses. Patent infringement The company is involved in legal complaints relating to the patent infringement. As of September 2008, the company has defended more than 21 patent infringement cases, 13 of which were filed during FY2008, and several pending claims are in various stages of evaluation. For instance, Texas MP3 Technologies filed action against the company and other defendants on February 16, 2007 in the US District Court for the Eastern District of Texas, Marshall Division, alleging infringement of U.
S. Patent No. 7,065,417 entitled “MPEG Portable Sound Reproducing System and A Reproducing Method Thereof. ” The complaint seeks unspecified damages and other relief. The hearing is set for March 12, 2009, and trial is scheduled for July 6, 2009. In case the company fails to succeed in any of the matters related to infringement of patent or other intellectual property rights of others or several of these matters are resolved against the company in the same reporting period, the company’s financial condition and operating results could be materially adversely affected.
Opportunities Smartphones Demand for smartphones among the mobile users is likely to grow rapidly over the next few years. Increasing demand for PC functionalities to support the data services along with the voice are expected to drive the smartphone markets. According to industry forecast, worldwide smartphone sales to end-users totaled 36. 5 million units in the third quarter of 2008, an 11. 5% increase from the same period in 2007. Apple has launched the iPhone, which is a multimedia and Internet-enabled mobile phone catering to the required functionalities. Phone is a combination of mobile phone, a widescreen iPod, and the internet functionalities and applications that support email, web browsing, and maps on a mobile phone. It has additional features such as multi touch display and related software. Apple gained third position in the global smartphone market and improved its market share to 12. 9% in the third quarter of 2008. Apple’s sales increased more than four times compared to the same period in 2007 as a result of wider geographical availability. The success of iPhone 3G sales in the third quarter of 2008 propelled the Mac OS X to the No. position in the global OS provider rankings. For the first time, iPhone sales exceeded sales of Microsoft Windows Mobile devices worldwide and in North America. Smartphone sales in North America were the fastest growing market, with a 68% increase in the third quarter of 2008. Smartphone sales in Europe, the Middle East and Africa (EMEA) increased 14% year-on-year. In Latin America, despite the decline in sales for all handsets, the smartphone market grew 56% in the third quarter of 2008. With an innovative product like iPhone, Apple is capable of increasing its share of growing smartphone markets.
New retail stores The company opened a total of 247 retail stores, including 205 stores in the US and a total of 42 stores internationally. The company has typically located its stores at high-traffic locations in quality shopping malls and urban shopping districts. A goal of the company’s retail business is to expand its installed base through sales to customers not owning the company’s products. The stores are designed to simplify and enhance the presentation and marketing of the company’s products and related solutions.
To that end, retail store configurations have evolved into various sizes in order to accommodate market-specific demands. The stores employ experienced and knowledgeable personnel who provide product advice, service, and training. The stores offer a wide selection of third-party hardware, software, and various other accessory products and peripherals selected to complement the company’s own products. By operating its own stores and locating them in desirable hightraffic locations, the company is better positioned to control the customer buying experience and attract new customers.
Threats Intense competition Apple operates in the highly competitive and rapidly evolving technology industry. The company faces intense competition in consumer electronics, personal computers and related software, and peripheral products. Rapid technological advances in both hardware and software, increasing the capabilities and use of personal computers and digital electronic devices, characterize these markets. Rapid changes in the technology have resulted in the frequent introduction of new products with competitive prices, features, and performance characteristics.
Some of the competitors of the company include Microsoft Corporation, Dell, Hewlett-Packard, Fujitsu, Samsung Electronics, Sony, and Toshiba, among others. Further, acquisition of Gateway by Acer has created a large player in the PC market The company is currently focused on market opportunities related to mobile communication devices including the iPhone. The mobile communications industry is highly competitive with several large, well-funded, and experienced competitors.
In 2009, Mobile phone maker Nokia launched a software and media store that aims to compete with Apple online marketplace. Intense competition among the PC producers has resulted in the price erosion threatening to erode the market share of the company. Uncertain global economic conditions Uncertainty in current global economic conditions poses a risk to Apple as consumers and businesses would postpone spending in response to tighter credit, negative financial news and/or declines in income or asset values.
Economic slowdown in any major geographic segment of the company would affect its financial performance. For instance, economic slowdown in the US would decrease the demand for Apple’s products and services. The US represented Apple’s largest geographic marketplace with approximately 57% of net sales in 2008 from sales to customers inside the US. According to the IMF projections, the advanced economies like the US is forecast to report a huge decline in GDP figures for 2009, compared to 2008.
The US economy, which was hit by the weak housing market, credit crunch and unemployment, is forecast to report a real GDP decline of 1. 6% in 2009 compared to 1. 1% growth in 2008. In addition, the current financial turmoil affecting the banking system and financial markets and the possibility that financial institutions may consolidate or go out of business have resulted in a tightening in the credit markets, a low level of liquidity in many financial markets, and extreme volatility in fixed income, credit, currency and equity markets.
There could be a number of follow-on effects from the credit crisis on the company’s business, including insolvency of key suppliers resulting in product delays; inability of customers, including channel partners, to obtain credit to finance purchases of the company’s products; customer, including channel partner, insolvencies; and failure of derivative counterparties and other financial institutions negatively impacting the company’s treasury operations.
Uncertain global economic conditions, could have a material negative effect on the demand for the company’s products and services.. Declining PC sales The PC sales are expected to decline in the near future. Analysts expect industry revenues to fall 5. 3% from 2008 numbers as against an earlier forecast of a drop of around 4%. Sales of Macs in the US stores in November 2008 declined 1% from a year ago. The UK PC market is also expected to decline in 2009. Industry sources have decreased its unit forecast for the market by 15%.
According to industry sources, the UK will witness a 3% fall in PC shipments during 2009 due to recession. The market is not expected to witness growth until 2010. Declining PC sales would affect the sales of Apple’s desktop products affecting its financial performance. Dependence on specific suppliers The company depends on the third party suppliers for various components used in its products. In the case of personal computers, Apple acquires most of the general components from multiple sources and certain key components from single or limited customers.
These key components include DRAM, NAND flash-memory, and TFTLCD flat-panel displays. The company also uses certain customized components from single source, which are not generally used by the other PC manufacturers. Continued availability of these components may be affected if producers concentrate on the production of components other than those customized to meet the company’s requirements. Lack of suppliers of key components could adversely affect the operations of the company.
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