Evaluation of the Financial and Business Performance of Apple Inc - Case Study Example

An analysis and evaluation of the financial and business performance of Apple Inc. between 26 September and 28 September Part I. Apple Inchas been chosen because there are lessons to learn from the company’s short history. The founder of the company Steve Jobs was forced to go out of the company he founded and he was re-inducted after ten years to resurrect the company and it has been a success story every since for the company even after the founder’s untimely demise. Fast growing new ventures attract much attention in academic research. There are companies which are mature but have struggled against heavy odds like reducing turnover and market failure. Some firms fall under both the categories. They are comparatively young firms which had a head start and failed within a short span of time only to reinvent themselves and start achieving phenomenal growth thereafter. For companies, it is easier to try something new from the beginning. For other companies who are already in some failing business, it is hard for them to change the existing business. Apple Inc is a well known computer manufacturer which nearly failed during the 90s will be the topic of this paper. Steve Jobs who started his career at the age of 21 by developing and building a personal computer in his family garage in 1976. He and Steve Wozniak founded Apple Computer, thus opening up a PC era in 1977. He is no more with us. The unique aspects of his functioning which contributes to the development of a new theory of leadership itself. The case study raises important questions, whether leadership is the job of a manager or a shared process. While hard skills are the domain of the managers, soft skills such as leadership are not necessarily possessed by a manager. These questions are now being asked since Steve Jobs proved himself without being a democratic leader in the strict sense of the term. It has been reported that at once stage Steve was relieved of his position as the CEO of his the company he started and owned, thanks to the dynamics of corporate governance. It did not deter him. He was not content with remaining its chairman. As a serial entrepreneur, he went about starting projects after projects. When his own first enterprise courted crisis in his absence, he seized the opportunity to rejoin the company and rescued it and continued as its CEO until his passing away recently. His is the story that it is not the ideal leadership attitude alone is the criterion for business success. It is not that Steve had no leadership qualities. Rather he gave new meaning and dimensions to leadership. His mantra for leadership was persistence and innovation (Anoymous, n.d.) His leadership has influenced five industries: computers, Hollywood, music, retailing and wireless phones. According to Bill Gates, the co-founder of Microsoft, Jobs was a visionary and took decisions in keeping with the taste of people and products. One does not have to imitate a leader to become another leader. Jobs’ style made him an automatic leader. Thus, Apple’s ex-employee Jay Eliot, an ex-Intel confides that Jobs had the temerity to offer him a job in Apple which Jobs could not afford as Eliot’s salary level had been already high. Jobs assured him that once his company went public garnering some $ 250 million, he could afford his pay. Secondly, Jobs had the habit of not disclosing anything until the last minute. That way, Eliot himself regretted joining Apple as nothing seemed to happen since Jobs used to break the news only when he was sure of it (Elliot & Simon, 2011). According to Eliot, Steve survived, thrived and changed society by following his own passions. He was a great consumer himself. So he had the sense of consumers’ expectations. His way of recruitment of people for key jobs was unique. He expected his potential recruits to have the ability to stand up to his harsh criticism while in job. He used to have no preset agenda, predetermined opinion when it came to interview people for jobs. His policy was to hire the best talent. He believed in creating an atmosphere that attracted talent. He never hesitated to poach the best people from other enterprises. He never failed to honour people for their contributions. He never took all the credit for himself. He made people know that he knew of contributions of others around him (Elliot & Simon, 2011). Steve believed that his employees were intrinsically motivated if their manager, CEO or leader personally connected himself with the product. Steve believed in “ hands on motivation” often asking people while walking along work spots “What are you working on?”, “What problem are you having ? “ and even “What are you doing to earn the money I’m paying ?”. His leadership tactic was holding very frequent review sessions. (Elliot & Simon, 2011). There are several theories of leadership. (Bolden, Gosling, Marturano, & Dennison, 2003).Transformational leadership is one which converts followers into leaders and leaders into moral agents. (Burns, 1978). Steve Jobs’ style could be characterized as transformational leadership. He positioned his company to seize the opportunities that went beyond the expectations of the company’s stakeholders. It is believed that for the next two decades, Steve Jobs’ style of leadership strategy will be the subject of business students as by rejoining Apple, he revived the company to new heights rather than just fixing its problems or offering conventional solutions. (Wooten, n.d.). Steve was actually achieving a positive deviance performance for his organization. Positive deviance is said to occur when an organization’s performance is at its best. The goal of positive deviance necessitates strength based approach to strategic planning. Concentrating on strength does not entitle one to ignore weaknesses or threats. The organizational members are empowered to understand firm’s core capabilities that can potentially sustain a positive deviant performance. Steve Jobs achieved this as the CEO from $ 5 billion when he returned to Apple to $ 170 billion within a decade. Apple’s success was not only on the financial front but also in the others. Its market share in the US for MP3 player market was 73 %. It was 11 % in smart phone market worldwide. Apple has already won awards of innovation, marketing and management. One of Job’s tactics was strategic story telling which motivated his employees and stakeholders. He proved that a leader should seize opportunities. He made apple a learning organization (Wooten, n.d.). 2. Project objectives and research questions This research will focus on how different factors have played crucial role for the successful re-emergence of the firm with even more vigour. Apple Inc was the company which created a revolution of personal computer in the 1970s but it soon lost its market to Microsoft with its well known Windows software which was cheaper to install; in PCs as against Apple’s bundle offering of expensive and richly engineered software along with hardware which beyond anyone’s budget. The entrepreneur Steve Jobs role was determined to achieve success both while he continued as a founder until 80s when he was ousted and after his re-entry in 1997. It would be an ideal approach to have an analysis of this company with strategic perspective as did by Anderson (2003) who wrote about Steve Jobs influence on the company’s growth as well as on the basis of factors at firm, sector and macro level. 3. Overall research approach This is a case study based on qualitative method of research approach which Yin (1994) considered adequate to address questions of “why” and “how” to examine a contemporary phenomenon within the context of real life situation. According to Ghauri (2004), case studies are strengthened by longitudinal approach, contextuality ability. Exploration of the environment by the researchers, and depth of analysis. Analysis in depth facilitates theory building and testing. The holistic study permits the investigation of the phenomenon from different levels. Qualitative research is recommended by Eisenhardt (1989) for areas where existing theories are inadequate. The company selected is Apple Inc for several reasons such as the fast recovery from a nearly bankrupted status to accomplish a high growth rate, company’s marketing competency in making its products desirable, customer retention while owning a small market share on its core competence of personal computers business. Further, the study involves quantitative approach in that a significant part of the paper will be devoted to analysis of its annual reports in terms of income statement and consolidated balance sheet and computation of ratios and other parameters required for the firm’s performance for the years 2010 and 2013. Part a of Part III will be literally quantitative analysis dealing with. Financial ratios, Growth, Profitability ratios, Liquidity ratios, Activity ratios/ Efficiency, Leverage ratios, Shareholders ratios and Part b will be qualitative analysis dealing with SWOT analysis. Part III Consolidated Balance Sheet of Apple Inc and Samsung for the years ended 2011,2012, 2013 Particulars Apple Samsung In millions USD 2013 2012 2011 2013 2012 2011 Cash 14259 10746 9815 15432 17807 12739 Short term Securities 26287 18383 16137 34798 16486 9997 Accounts Receivables 13102 10930 5369 26415 25277 20943 Inventories 1764 791 776 18132 16817 13628 Deferred Tax Assets 3453 2583 2014 Vendor non-trade receivables 7539 7762 6438 1411 1193 Advances 1827 1587 1245 Prepaid Expenses 2343 2144 2019 Assets held for sale 2574 Available for sale-financial assets 569 Other current assets 6882 6458 4529 2024 1385 857 Total current assets 73286 57653 44988 104956 82696 61997 Long-term marketable securities 106215 92122 55618 Property, plant, equipment etc 16597 15452 7777 71540 64896 53797 Goodwill 1577 1135 896 Acquired Intangible assets 4179 4224 3536 3772 3535 2909 Other Assets 5146 5478 3556 687 Associates and Joint ventures 6086 8325 7981 Long term prepaid expenses 3284 3331 2995 Deferred income tax assets 4380 2384 1400 Other non-current assets 2928 1461 383 Available for sale financial assets 5911 4955 2795 Total Non-current Assets 133714 118411 97901 88887 72829 Total assets 207000 176064 116371 202857 171583 134944 Account payable 22367 21175 14632 16709 16004 16049 Accrued expenses 13856 11414 9247 10750 8998 6784 Deferred revenue 7435 5953 4091 Short term borrowings 6101 8001 8371 Current portion of long term borrowings and debentures 2299 947 26 Provisions Provisions 6383 4790 3047 Other current liabilities 443 326 311 Advances received 1617 1438 1258 Withholdings 1114 916 1487 Income tax payable 3209 3054 1095 Total current liabilities 43658 38452 27970 48626 44474 38428 Deferred revenue – non-current 2625 2648 1686 Long-term debt 16960 0 0 999 1105 3193 Long-term other payables 933 3433 889 Provisions 437 387 315 Other non-current liabilities 20208 16664 10100 1010 447 316 Debentures 1242 1734 1110 Deferred Income Tax liabilities 5697 3250 2023 Retirement benefit obligations 1758 1639 363 Total long term liabilities 12076 11995 8209 Total liabilities 83451 57854 39756 60702 56469 46637 Shareholders’ equity 123459 118210 76615 142155 115114 88307 Total liabilities and shareholders’ equity 207000 176064 116371 202857 171583 134944 Consolidated Income Statement of Apple Inc and Samsung Electronics for the years 2011, 2012, 2103. Particulars Apple Samsung In millions USD 2013 2012 2011 2013 2012 2011 Net Sales 170910 156508 108249 216709 187754 143069 Cost of goods sold 106606 87846 64431 130481 118244 97238 Gross Margin 64304 68662 43818 86227 69510 45831 Operating expenses 15305 13421 10028 51371 42389 31741 Operating income 48999 55241 33790 34857 27121 14090 Other income –net (expnse) 1156 522 415 1497 808 788 Income before tax 50155 55763 34205 36354 27929 14878 Provision for income tax 13118 14030 8283 7476 5667 2970 Net income 37037 41733 25922 28878 22262 11908 Earnings per share Basic $40.33 $ 44.64 $ 28.05 $ 187.47 $ 143.80 $ 77.23 Diluted $ 39.75 $ 44.15 $ 27.68 $ 187.44 $ 143.73 $ 77.16 Financial ratios a. Growth Particulars Apple Samsung Year 2013 2012 2011 2010 2013 2012 2011 2010 Sales 170910 156508 108249 65225 216709 187754 143069 134076 % ( + ) or (-) + 9.2 % + 45 % + 66% + 15.42 + 31.23 % + 6.71 % b. Profitability Particulars Apple Samsung Year 2013 2012 2011 2010 2013 2012 2011 2010 Net Income 37037 41733 25922 14033 28878 22262 11908 14000 % ( + ) or (-) -11.25 % + 61 % + 84.72 % + 29.72 % + 90.56 % - 14.94 % c. Liquidity Ratios . Current Ratio Apple 2013 2012 2011 Samsung 2013 2012 2011 Current Assets / Current Liabilities 73286/43658 57653/38452 44988/27970 104956/48626 82696/44474 61997/38428 Current Ratio 1.68 1.50 1.61 2.16 1.86 1.61 Current ratio is the indicator of a firm’s ability to meet its short term business obligations during the next 12 months which creditors take into account while granting loans to the firm. The higher the ratio, the higher the liquidity. While commonly acceptable ratio is 2 that indicates comfortable position of a firm, acceptable ratio differs from industry to industry. However, a ratio of 1.5 is acceptable for most industries. Activity ratios/ Efficiency - d. Accounts Receivable turnover Accounts Receivable Turnover Apple 2013 2012 2011 Samsung 2013 2012 2011 Annual Credit Sales/Average Accounts Receivable 170910/13102 156508/10930 108429/5369 216709/26415 187754/25277 143069/20943 Ratio 13.04 14.31 20.20 8.20 7.43 6.83 e. Average Collection Period Average Collection Period Apple 2013 2012 2011 Samsung 2013 2012 2011 TRADE ACCOUNTS RECEIVABLE ÷ (SALES/365) 13102÷(170910/365) 10930÷(156508/365) 5369÷(108249/365) 26415÷(216709/365) 25277÷(187754/365) 20943÷(143069/365) Ratio 28 days 25 days 18 days 44 days 49 days 53 days f. Inventory turnover Inventory turnover Apple 2013 2012 2011 Samsung 2013 2012 2011 COST OF GOOD SOLD ÷ AVERAGE INVENTORY 106606/1764 87846/791 64431/776 130481/18132 118244/16817 97238/13628 Ratio 60 times 111 times 83 times 7.19 times 7 times 7.14 times Leverage Ratios g. Debt Ratio Debt Ratio Apple 2013 2012 2011 Samsung 2013 2012 2011 TOTAL LIABILITIES ÷ TOTAL ASSETS 83451/207000 57854/176064 39756/116371 60702/202857 56469/171583 46637/134944 Ratio 0.40 0.33 0.34 0.30 0.33 0.35 h. Debt Equity Ratio Debt Ratio Apple 2013 2012 2011 Samsung 2013 2012 2011 TOTAL LIABILITIES ÷ TOTAL SHAREHOLDERS EQUITY 83451/123459 57854/118210 39756/76615 60702/142155 56469/115114 46637/88307 Ratio 0.68 0.49 0.52 0.43 0.49 0.53 i. Shareholder Ratios Dividend per share Dividend per share Apple 2013 2012 2011 Samsung 2013 2012 2011 Total dividends paid/total number of shares Ratio Dividend yield Dividend yield Apple 2013 2012 2011 Samsung 2013 2012 2011 DPS/market price of shares x 100 Ratio Apple SWOT Analysis Strengths : Brand value: Apple is such a powerful brand that reflects company’s ability to sell its niche products at very high prices. Apple has been adjudged the 2nd most valuable brand worldwide in the year 2012 just next to Coca-Cola. The massive brand value of Apple can be gauged by the massive fan following of over 500 million registered users of iTunes. Expertise: High technical know-how: Apple has been the leader in introducing high-quality hardware be it a smart phone, tablet, MP3 Player or PC all reinforced by durable software and value added services. Ecosystem: Apple’s network has been one of its core durable competitive advantages with which the company has been to retain users for long-time in its ecosystem of 35 million songs, 60,000 movie titles, 1.75 million iBooks and 850,000 iOS apps. This literally prevents its users from switching over to company rivals running on Google’s Android OS. Pricing Power: Apple is able to charge premium prices owing to brand value created by the high quality of its innovative products. This has led the company to earn more than what its rivals in the IT hardware field can earn. Thus, almost 86 % of its shareholders’ equity shown in the balance sheet comprises of retained earnings (Faruk, 2013). Innovations in practice as a business model: Apple has all along been focussing on production of innovative hardware especially personal computers. Apple’s music distribution as an activity with its creation of iPod and associated music download business if iTunes has made it the first electronics company to have music distribution as an activity along with the development of iPod hardware and software. In this manner, Apple initiated many sub-activities of legal music downloads to its customers while at the same time avoiding additional costs in the offering of new service. In this way “Apple expanded its locus of its innovation from the product space to the business model” (Amit & Zott, 2010). Apple raised its capital from public for $ 97 million way back in 1980 as the first and last time in its 37 year history. During this period of 37 years, its employees, suppliers and the government agencies have been the value creators for the company by investing in its critical technology. It was in April 2013, Apple announced repurchase of its own shares of about $ 60 billion and that it would distribute $ 40 billion in dividends by the end of year 2015. Beneficiaries of this massive value creation are stock market speculators and manipulators. The second decade of the 21st century has seen Apple as the world’s most famous and the richest company. The founder Steve Jobs who has been an icon both in life and death has placed highly placed technology in the hands of masses. The stock gave Apple the highest market capitalisation of any company in the world. The phenomenal success saw Apple having $ 121.3 billion in liquid assets, $ 10.7 billion in cash and cash equivalents, $ 18.4 billion in short-term marketable securities and $ 92.1 billion in long term marketable securities. The success of the company could be attributed to the strategic control of the founder Steve Jobs who was just 21 years old when he started the company. In March 2009, Steve Jobs declared in a television interview “manage the top line, which is strategy and your people and your products, and the bottom line will follow” “My model for business is the Beatles. They were four guys that kept each other’s negative tendencies at check; they balanced each other ...and the total was greater than the sum of the parts. Great things in business are never done by one person, they are done by a team of people” ( P14). He had a talent of aligning himself with talent which brought out the imagined product into reality. It has been the company built on unique culture. The Macintosh design team functioned in a separate building with a pirate flag flying over it. The company created a cult-like commitment among its employees who were recruited stating that would help change the world (Lazonic, Mazzucato, & Tulum, 2013). The Government Agencies had a role in the company’s development of fundamental technologies of the iPod, iPhone and iPad are European Organization for Nuclear research, Central Intelligence Agency, Defense Advanced Research projects Agency, Department of Defense, department of Energy, National Institutes of Health, National Science Foundation, and Royal Radar Establishment (Lazonic, Mazzucato, & Tulum, 2013). Weaknesses: Reliance on iPhone: The company’s crown jewel iPhone makes up more than 57 % of its sales revenues. But this may not last long due to product life cycle risk. Carrier subsidies : Apple’s most of the heavily priced phones are subsidised to consumers through up-front carrier subsidies from telecom providers which practice is prevalent only in the U.S. and other developed country markets. This is unlikely in emerging markets since most of the EM consumers are not in the practice of paying for data plans and buying the phone outright. Offshore cash: Apple’s offshore cash of more than $ 102 million if repatriated into the country will entail heavy tax burden. Sluggish innovation: Company has not brought any innovative product in the recent past. Declines in PC: Originally started as a computer manufacturer, it still relies on PC sales though casual users have switched over to tablet devices etc. Apple’s sale of Mac was 27 % of total revenues in 2010 and it has since been reduced further down to 12 % (Faruk, 2013). Opportunities : Enterprise Solutions Market: Apple has opportunities to enter into secure devices types such as Black Berry whose touch screen device is expected to sell in quantities of not less than 4 million in one quarter. Services Expansion : Apple’s constant addition of newer apps and iTunes content has brought them incremental revenues. Apple’s iRadio recently launched is a valuable addition since it is ad-supported and will likely fetch more A La Carte sales on iTunes. iTunes and other services already fetching more than $ 16 billion in revenues will fetch even more in the future. The company can introduce newer versions like Hulu and Netfix which can bring in more revenues. Ad Exchange: Although advertising is not a core business of Apple, iRadio recently launched provides for a robust Apple ad exchange. Advertisers can now use Apple’s user data and buy patterns to place ads on iPhones, iPads and MacBooks. Apple can build this business abd earn incremental non-core revenue. Newer and existing products : Although Apple can readily launch a big screen TV and Apple iWatch, it can instead earn from emerging markets from its iPhone and iPAd products. Smartphone market is expected to touch 1,4 billion units by 2016 every year. The tablet market, three times of the present level to touch 375 million units by 2016 (Faruk, 2013). Threats Android : Google’s open source OS, Android, OEMS particularly that of Samsung have all been flooding the market with android phones at lesser prices with increasing market share in the emerging economies. Thus, smartphones having Google’s android OS now have 52 % market share and iOS based devices have 39.2 market share in the U.S. Android based devices have experienced more than 900 million activations and this volume is expected increase at a rapid pace further. New Products: Apple’s existing competitors are constantly launching tables and smartphones along with new competitors. Cheap prices devices like Nexus line and Amazon’s kindle line are further exerting pressure on Apple to bring down prices to remain competitive. Black Berry, Samsung and HTC have been introducing newer and more innovative products. Competition and Price cuts: Apple had to reduce its prices of iPhones and iPad units due to stiff competition from its rivals. Average Selling Prices (ASP) of iPhone and iPad have been reduced $ 613 and $ 449 recently. And these prices are likely to be reduced further given the intensity of the prevailing competition (Faruk, 2013). However, it is understood that Apple have a number of innovative products in the pipeline and should be coming up with newer versions anytime now. It cannot be denied that Apple has been the centre of technological revolution and its longstanding shareholders have been benefited over 1,000% profits (Faruk, 2013). Apple has been accused of tax avoidance of $ 9 billion by the U.S. Government in 2012. (Lazonic, Mazzucato, & Tulum, 2013) Read More