Strategies that You Must Learn from Apple Marketing - Essay Example

?Apple Inc. Executive Summary Although stock market value does not always reflect real business operations, it is the goal of this study to provide justifications on why Apple Inc. is an appealing investment. By analyzing the company in terms of its overall strategy to specific business activities, the researcher is able to forecast the stock value of Apple for the next three years. Company Review Apple Inc. designs, manufactures, and markets its own line of hardware and software products, as stated in the company’s 2011 Annual Report. As for the hardware products, Apple sells personal computers with Mac; portable digital music players with iPod; tablet personal computers with iPad; and televisions with Apple TV. As for the software products, Apple offers a complete portfolio of consumer and professional software applications which include iOS and Mac OS X for its operating system; and iCloud for its online content tool. Moreover, Apple sells and delivers digital content and application such as music and literary art through iTunes Store, App Store, iBookstore, and Mac App Store. In line with its unique offerings, Apple sells a variety of third party compatible products such as printers, storage devices, speakers, and headphones; as well as applications of software programs. In terms of customers, Apple caters to private consumers, small and medium-sized businesses, and the education sector. Demographically, Apple’s private consumers are mainly consisted of young, early adopters who are technologically-savvy and are followers of media trends, as described by David Appleyard in his online article entitled Profile of an iPhone User: Interesting Statistics about Yourself. Being heavy users of the web and mobile devices, they always want to get updated with the current social happenings. Apple also caters to small and medium-sized business by providing hardware and software products that aim to simplify its business operations through easy-to-use computer products and software applications. As for the education sector, Apple is also committed to bringing the effective integration of technology into the classroom set-up to attain higher levels of student achievement. As such, Apple supports mobile learning and distribution of education materials through iTunes U. Apple’s company vision is driven by its commitment to bring the best customer experience through valuable product innovation. As such, the company’s business strategy focuses on its “unique ability to design and develop its operating systems, hardware, application software, and services to provide its customers new products and solutions with superior ease-of-use, seamless integration, and innovative design” (Apple 1). In line with this overarching goal of delivering innovative products and services, Apple invests heavily on research and development, as evidenced by its expenditures of $2.4 billion, $1.8 billion, and $1.3 billion for 2009, 2010, and 2011, respectively. This is grounded on Apple’s belief that in order to compete successfully, it must ensure a continual and timely flow of competitive products and services to the market. Keeping with its mission of driving innovation, Apple consistently manufactures hardware and software products that are known for its simplicity and beauty. In this light, functionality and form essentially constitute the key attributes of all its products. As highlighted in an online blog entitled 7 Strategies that You Must Learn from Apple Marketing, Apple’s success banks on turning the ordinary into something beautiful. But developing a good product and service is not enough. It must be delivered and communicated well to the consumers. Thus, as part of its business strategy, Apple also emphasizes on enhancing the customer experience and creating relevant marketing communications. Firstly, giving valuable customer experience relies on ensuring a smooth and unique point-of-sale service. Thus, having strategic distribution networks is important. Currently, Apple manages its own retail and online stores; as well as third-party resellers. As for its retail stores, Apple believes in making its products and services closer to the customer. Thus, “the Company’s retail stores are typically located at high-traffic locations in quality shopping malls and urban shopping districts. By operating its own stores and locating them in desirable high-traffic locations, the Company is better positioned to ensure a high quality customer buying experience and attract new customers” (Apple 2). Furthermore, the design of its retail stores is intended to simplify and enhance the presentation of its products and services. Apple also ensures that its salespersons are able to effectively convey the features of its products and services through product advice, service and training. In addition to its own retail and online stores, Apple puts premium on third-party resellers as they are able to bolster product credibility without having certain biases. In this sense, Apple has its Premium Reseller Program that provides a high level of product expertise, integration and support services. All of these service enhancements are in line with Apple’s goal of providing valuable customer experience. As succinctly captured in an online article entitled Apple’s Lesson: Be Cool with Capital, “Apple’s obsessive focus on user experience is the horse that pulls the technological cart” (Bhatia 1). Secondly, Apple believes that as technology continually creates a more inter-connected world, it is crucial to come up with substantial and outstanding marketing communication materials. As such, Apple has executed successful advertising campaigns such as Think Different and Mac vs PC. The success of the Think Different ad banks on its mind-stirring copy. Centrally communicating the value of creativeness in driving human development, Think Different, as noted in another online article entitled Think Different: the Ad Campaign that Restored Apple's Reputation, was able to concretize Apple’s brand image, which is all about innovation. On the other hand, Mac vs. PC comically executes a classical comparison of the features of two products to highlight the better one. By assigning personas to Mac and Windows, the ad was not only able to describe the attributes of the two products, but also typify the users of it. Although the ad garnered a lot of negative criticisms, especially from the users of Windows, the ad was able to strengthen the ‘cool’ image of the brand. From a branding perspective, the success of Apple lies on the creation of an aspired image that is followed strongly by countless passion groups who are adamant in nurturing and protecting the Apple brand. As highlighted in an online web page entitled Apple’s Brand Strategy, “the Apple brand is not just intimate with its customers, it's loved, and there is a real sense of community among users of its main product lines” (MarketingMinds 1). At this point, it is crucial to note that Apple’s commitment to product innovation, relevant customer experience, and memorable marketing communications all contributed to the financial success of the business. According to the company’s 2011 Annual Report, net sales for 2011 increased $43.0 billion or 66% compared to 2010. The increase is primarily attributed to the following factors: Firstly, net sales of iPhone and related products and services increased by 87%, amounting to $47.1 billion. Total units sold totaled 72.3 million, which represents 81% increase versus the previous year, 2010. The increase in sales is caused by the strong market demand for iPhone 4. Furthermore, the expansion in terms of domestic distribution of iPhone products to the Verizon Wireless network in February 2011 also contributed to this increase. Thus, as of September 24, 2011, Apple has distributed iPhone products in 105 countries through 228 distribution hubs. Secondly, net sales of iPad and related products and services increased by 311%, amounting to $20.4 billlion. Total units sold totaled 32.4 million, which represents 334% increase versus previous year, 2010. The primary contributors to this change are strong sales and marketing efforts, and third-party promotional activities by cellular network carriers. Thus, as of September 24, 2011, Apple has distributed to 90 countries. Thirdly, net sales of Mac and related products and services increased by 25%, amounting to $21.8 billlion. Total units sold totaled 3.1 million, which represents 22% increase versus previous year, 2010. The increase in demand of MacBook Air and MacBook Pro elevated total sales. Lastly, net sales of music-related products and services increased by 28%, amounting to $6.3 billlion. The increase in net sales was largely influenced by iTunes Store, as driven by App Store expansion in new customer segments. As customers get more interested in downloading third-party digital content, the company foresees the growth of this product segment in the coming years. In terms of the company’s gross margins, the percentage increase for 2011 is pegged at 40.5%. However, the company expects to attain a lower percentage as the manufacturing of higher mix of new and innovative products with flat or reduced pricing is done. Thus, operational costs are expected to be alleviated. In terms of its operating expenses, the major contributors are Research and Development (R&D); and Selling and Administrative Expenses. It is clear that, in line with the company’s business strategy of delivering product innovation and maintaining unique and relevant customer experience, most of its funds are channeled into these two areas. As for R&D, the company spent $2.4 billion, which is a 2% increase versus previous year, 2010. As for Selling and Administrative Expenses, which constitute the maintenance of retail stores and training of sales personnel, the company spent $7.6 billion, which is a 7% increase versus previous year, 2010. Looking forward, the company aims to successfully cope with aggressive competition in the markets where it competes in. Generally, these markets are characterized by frequent product introductions and rapid technological advances. As further stated in the 2011 Annual Report, Apple’s competitors who sell mobile devices and personal computers based on other operating systems have aggressively cut prices and lowered their product margins to gain or maintain market share. In summary, the principal competitive factors that define the sales of Apple are “price, product features, relative price/performance, product quality and reliability, design innovation, a strong third-party software and peripherals ecosystem, marketing and distribution capability, service and support, and corporate reputation” (Apple 6) Economic Forecast According to the yearly economic forecast of the Congressional Budget Office entitled The Budget and Economic Outlook: Fiscal Years 2011 to 2012, the economic growth for 2011 to 2013 would remain moderate. As highlighted in the same report, real GDP is expected to increase by 3.1% for 2011 and 2.8% for 2012. This economic projection is forecasted to deliver the following changes: (1) improvement of employment rate; (2) low inflation rate with the increase of personal consumption expenditures (PCE) price index and consumer price index for all urban consumers (CPI-U); and (3) increase of interest rates as treasury bills climb up in percentage. It is important to note, furthermore, that the projections made are based on the strong growth in business investments, as driven primarily by improvements in residential investment (construction of new homes, home improvements, and brokers’ commissions on home sales); net exports; and modest increases in consumer spending. Stock Market Forecast As posited in the latest online article by CNNMoney entitled Stocks Poised to Edge Higher, U.S. stocks are expected to increase in value due to political changes that currently affect the world market, specifically, the European debt crisis that continue to beset Italian citizens. As stated in the same report, “The Dow Jones Industrial Average (INDU), S&P 500 (SPX) and Nasdaq (COMP) futures were up less than 1%” (CNNMoney 1). Moreover, as discussed in the S&P 500 Index for November, 2011, stock index increased for the sectors of health care, information technology, and utilities. With the adjusted market cap of $11.4 billion, the primary contributors come from the sectors of information technology at 19.71%, financials at 13.71%, and energy at 12.53%. Sector and Industry Forecast Apple generally competes in the computer hardware industry. However, since it offers a wide range of hardware and software products, the brand is present in the following sub-markets: (1) personal computer industry with its Macintosh line of computers and related software; (2) consumer electronics industry with products such as the iPod and add-on gadgets; (3) digital music distribution through its iTunes Music Store; (4) smart phone market with the Apple iPhone; and (5) magazine, book, games and applications publishing though the AppsStore for iPhone and the iPad tablet computing device. As for the market share breakdown of the said industry, an online article released by the New York Times entitled Computer Hardware Industry Outlook described Apple, Inc. as the top company with the highest market cap of $372 billion. The company is followed by Hewlett-Packard Co. at $53.6 billion; and Dell, Inc. at $28.08 billion. Since the industry is generally characterized by constant product innovations and competitive imitation, competitors are expected to either bank on offering competitive prices or providing unique product attributes to capture market share. Whatever the case is, however, competitors have to be wary of current and upcoming technological trends as it will strongly dictate consumer demand and purchase behavior. As discussed in an online blog entitled After the Cloud: Top Tech Trends for 2012, there are three technological trends in 2012 that will create considerable impact on the way consumers use technology until 2013 – (1) the rise of cheaper smart phones as being aided by cellular network sites like AT&T and Verizon; (2) strengthening of Internet TV as furthered by Time Warner and Comcast that aim to deliver high-quality television streaming; and (3) introduction of hybrid personal computers. Ratio Analysis At this point, it is essential to conduct a company valuation of Apple vis-a-vis its top two competitors in the computer hardware industry. Investing, like any other major endeavor, involves a critical analysis of the business by looking into its current and future operations and earnings. Thus, it is crucial to revisit Apple’s financial statements and conduct valuation as guided by the solvency and profitability ratios. Firstly, solvency ratios help determine Apple’s capacity to meet its long-term obligations and thus remain solvent and avoid bankruptcy. As for the general solvency ratio, which identifies whether the company owns more than it owes, the calculated value is 2.92 or 292%. This means that Apple is solvent as it is able to pay its debts. As for the debt ratio, whether the company relies on debt to finance its assets, the calculated value is 0.34 or 34%. This means that investing in Apple is less risky as it does not rely too much on debts to finance its assets. Logically, this can mean that it harnesses its funds from its sales. As for the debt-to-equity ratio, which determines how much financing the company has in the form of debt as compared to how much it has invested in the business, the calculated value is 0.52 or 52%. This means that the company is able to balance its debts with equity liabilities. Secondly, profitability ratios describe Apple’s ability to generate returns on the investments made. Generally, a company is deemed profitable if it is liquid and efficient. As for the return-on-sales, dividing net profit by sales, Apple makes 0.36 of every dollar sold. As for the return-on-assets, dividing net profit by assets, 34% returns to the invested assets when it employs business operations. As for the return-on-equity, dividing net profit by equity, 52% returns to the owners of the company whenever it makes profit. Summarizing all the financial observations attained, it can be claimed that the primary strength of Apple is on its solvency. As evidenced by the solvency ratio and debt ratio, the company does not incur major debts, which allows it to channel the sales obtained into asset investments. Furthermore, Apple can be regarded as investor-friendly, as observed in high return-on-equity ratio. Aside from its financials, the strength of Apple is also formed by its brand equity. Its reliance on heavy marketing and advertising has truly paid off as it is a top-of-mind of consumers for the most innovative and highly creative brand for technology. However, the major weaknesses of Apple are highlighted by its relatively low profitability ratios. For one, the low return-on-sales indicates high operational expenses. Although this finding validates the reliance of the company on major technological investments to come up with innovative products, it needs to devise concrete ways on how it can lower costs. Another major weakness is founded on return-on-assets. Linking this back to the above observation, this indicates less efficient business operations. Looking forward, the primary opportunities for Apple lie on its ability to add new products on its offerings. Also, with strong market reception as evidenced by certain ‘cult following’, it Apple can be assured of its future success if ever it plans to launch a new product. Lastly, the tight competition among the key players in the computer hardware industry proves to be the biggest threat for Apple. Since the industry is open to constant technology imitation and price war, Apple has to strategize on how it can nourish and protect its strong brand equity. Company Financial Forecast and Valuation Based on the current stock market data, Apple Inc is valued at $404.78. This value is expected to increase, looking at three years ahead. This stock value projection is based on the observable trends in terms of the company’s business operations and overall strengths. To put things in a proper context, a financial forecast for Apple Inc is created, which can be seen in the Appendix. Firstly, as for the sales or revenues, it is expected to increase by 15% in the next three years. This percentage is based on the assumption that Apple is able to strengthen its sales and marketing force; as well as intensify its distribution strategy. Although innovation is crucial in driving the success of the business, the stable brand equity can also pave the way in the increase of overall sales. As examined in the company analysis, the majority of sales will come from the cellular phone sector, with iPhone 4S taking the lead. Next to it is the iPad, followed by Mac. Apart from this, third-party endorsements that come from actual users and from various network corporations can also bolster the credibility of the brand, and therefore bring in more customers. Secondly, as for the cost of sales (which primarily pertains to the cost of creating the hardware and software products), it is expected to increase by 3%. There are various factors contributing to this change. For one, most of the components for Apple’s hardware products come from a few identified suppliers—the same scenario is applied to Apple’s software applications in which Apple relies on few third-party program developers. Unfortunately, its direct competitors also rely on the same suppliers for the creation of its own line of products, both for software and hardware. In effect, this exposes Apple to supply and pricing risks. Although Apple has remedied this problem by getting into agreements with certain suppliers on the exclusive provision of their products, there can be no guarantee that Apple will be able to extend or renew these agreements on the next three years. Also, since innovation is at the core of its business operations, most products that are to be created entail certain components which may not be offered by Apple’s existing suppliers. Because of this, Apple has to expand its network of suppliers in order to acquire the right suppliers for its projects. As for its product manufacturing and logistical services, Apple relies on few suppliers that are situated outside of the U.S. Although having few suppliers lowers the operating costs, it may reduce Apple’s direct control over production and distribution, which may greatly affect the quality of its products. In this light, the claimed increase in cost of sales is influenced by the interplay of socio-economic and political forces. Although GDP is expected to increase, Apple remains vulnerable to the said forces. Thirdly, as for the operating expenses, it is expected to increase with the rise of both (1) research and development; and (2) selling and administrative expenses. As for research and development, the company believes that focused investments in R&D are critical to its future growth and competitive position market place through the timely development of new and enhanced hardware and software products. In this light, R&D will continue to increase by 3% in the coming three years. Revisiting the return-on-assets ratio of 34% also entails the expenses incurred with R&D. In addition to this, the following factors are also said to contribute to the increase in R&D expense: compression of product life cycles which drives the need for frequent product introductions and enhancements; product transitions which involves changes in the components; and potential increases in the cost of components, since suppliers are few. As for the selling and administrative expenses, it is projected to increase by 8% due to the addition and enhancement of retail stores; and the constant training of sales personnel to enhance overall customer experience. As claimed in the 2011 Annual Report, “The Company’s retail stores have required substantial fixed investment in equipment and leasehold improvements, information systems, inventory and personnel. The Company also has entered into substantial operating lease commitments for retail space. Certain stores have been designed and built to serve as high-profile venues to promote brand awareness and serve as vehicles for corporate sales and marketing activities” (Apple 36). In terms of its staff engagement and training programs, Apple believes that it is important to properly guide them in the use and communication of products in order to effectively deliver the unique attributes of the products. Social Responsibility As for its corporate social responsibility, Apple ensures that it plays the cards right by following local and international standards in the manufacture of its hardware products. As identified earlier, most of its components are manufactured by outside suppliers. Because of this, not only does Apple has to ensure good arrangements with its suppliers, it also has to nurture and protect its company and brand image by encouraging its suppliers to follow strict operational guidelines set by the government to maintain safe and clean operations. Furthermore, in line with keeping an ethical business, the company also has employee programs that encapsulate: (1) decent giving of salaries and essential employee benefits; (2) managing corporate programs that aim to raise the moral of its employees; and (3) tightening the relations between its blue-collar and white-collar employees. Lastly, Apple extends the goal of its business to societal level by funding organizations that help the less privileged. Through all of these activities, Apple intends to do businesses justly and ethically. Conclusion The projected stock value of Apple after three years is $600. Thus, investment is truly profitable. Although it is evident that the company is expected to increase most of its operational expenses, in line with keeping innovative and best-quality customer experiences, its strength still lies on the brand equity that it has nourished and protected through the years. Both its third-party suppliers and its ultimate customer continue to support the brand because they believe in Apple’s capacity to innovate and enhance its products for better customer use. Appendix Income Statement   2011 2012 2013 2014 Net Sales 108,249 124486.4 143159.3 164633.2 *Increase by 15% annually Cost of Sales 64,431 66363.93 68354.848 70405.493 *Increase by 3% annually Gross Margin 43,818 58122.42 74804.455 94227.705 Operating Expenses 10,028 10,709 11,440 12,227 Research and Development 2,429 2501.87 2576.9261 2654.2339 *Increase by 3% annually Selling, General and Administrative 7599 8206.92 8863.4736 9572.5515 *Increase by 8% annually Net Income Before Tax 33,790 47,414 63,364 82,001 Ratios SOLVENCY RATIOS (in billion dollars) I. Solvency Ratio total assets 116,371 total liabilities 39,756 2.92713 net worth 25,922 total liabilities 39,756 0.652027 II. Debt Ratio: total debt 39,756 total assets 116,371 0.341632 III. Debt to equity ratio Total Liabilities 39,756 Total Owners’ Equity 76,615 0.518906 IV. Others: Breakdown of Liabilities Short term debt ratio Short-term Debt 27,970 Total Debt 39756 0.703542 PROFITABILITY RATIOS (in billion dollars) Return on Sales Net Profit 39756 Net Sales 108,249 0.3672644 0.36 cents per 1 dollar sale Return on Assets Net Profit 39756 Total Assets 116,371 0.3416315 34 percent return on assets when it employs operations Return on Equity Net Profit 39756 Owner's Equity 76,615 0.5189062 52 percent return on the capital investment References: 7 Strategies that You Must Learn from Apple Marketing. KISSmetrics, 2007. Web. 8 Nov 2011. Agnello, Anthony. After the Cloud: Top Tech Trends for 2012. InvestorPlace, 2011. Web 8 Nov 2011. Apple, Inc. 2011 Annual Report. EdgarOnline, 2011. Web. 8 Nov 2011. Apple’s Brand Strategy. MarketingMinds, 2010. Web. 8 Nov 2011. Appleyard, David. Profile of an iPhone User: Interesting Statistics about Yourself. Gigaom, 2010. Web. 8 Nov 2011. 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