Apples Strategic Financial Management - Case Study Example

Apple’s Strategic Financial Management Name Institutional Affiliation Introduction to Apple Short introduction, Business of Apple Apple is an American-based multinational that deals in the designing and production of PCs, PC programs in addition to a scope of hand-held devices. Started in 1976 by Steve Wozniak and Steve Jobs, the company has developed to become one of the present day's manufacturers and distributor of different electronic devices. Despite the fact that Apple deals in an extensive variety of items, the organization treats each product in a remarkable manner. Every product of Apple is dealt with as a standalone specialty unit (Edwards, 2010). The organization went public in 1980 and turned into the best first sale of stock since Ford Motor Company in 1956. After a few years of going public, Apple hit the Fortune 500 list of fastest growing organizations. However, the rapid growth accompanied by the increasing external rivalry from other companies such as Microsoft and IBM throughout the 1990 has nearly forced the company into bankruptcy in the early and mid the mid-1990s. To stay above water, Apple was compelled to enhance their PC product offerings and venture into the digital music (DM) industry, eventually becoming the business leader (Apple Inc, 2014). In the past decade, Apple has seen unparalleled achievement and now designs, fabricates and markets a variety of electronic devices including versatile communication products, media gadgets, PCs, and convenient digital music player (Edwards, 2010). Forced to come with an advanced and creative dissemination strategy, to contend with bigger organizations, Apple now offers its items worldwide through its online stores and its own retail locations, producing yearly incomes of more than $21 billion (Apple Inc, 2014) . With expanded rivalry, the organization should now adopt an expansionary strategy to cultivate natural development while taking into consideration conceivable acquisitions, which will make it possible for the company to increase it revenues and maintain its market position. The current strategy of Apple As a global leader in computer and consumer electronics, Apple is governed by four main philosophies, which are a direct sales business model, services that focus on customer satisfaction “Think Different” (continuous innovation spirit), direct sale business model, and the company’s brand power. Under “Think Different,” the company puts great effort in coming up with new innovations as well as upgrading of the products already in the market. Over the years, the company has also been able to utilize strategies applied by other companies (Forbes, 2015). These strategies include directly selling its products to its customers over web stores, by phone, as well as the company’s stores located across the different regions of the world. The company has been able to expand its customer base through its customer focused services as well as other programs such as the “Switcher” campaign Mac. The company’s success over the past decade does not only prove that the company is a hardworking inventor and innovator, but that it is also a successful strategist. To stay ahead of its competitors, the company also makes use of a differentiation strategy. Under this strategy the company’s product are differentiated from those offered by other manufactures in terms of design, quality, pricing, as well as functionality (Edwards, 2010). The company has been able to maintain a loyal pool of customers by producing and marketing unique products that sets the users of Apple products apart from others (Meyer, 2012). Apple has grown into a global brand as a result of the differentiation strategy. Apart from that, the company designs and manufactures a wide variety of electronic gadgets including smart phones, tablets, and personal products. The company also utilizes a high price marketing strategy. Under this strategy, the company offers its products at very high prices compared to average prices in the market. The electronics consumer market can be split into low-end, mid end and high end markets. The high-end consumer market is characterized by high income earners who have a higher purchasing power. It is in this market that Apple Inc focuses on (Forbes, 2015). The Company is focused on conveying the best client experience to its clients through its creative equipment, programming, and administrations. The Company's business procedure influences it capacity to plan and add to its working frameworks, equipment, application programming and administrations to give its clients items and arrangements with imaginative configuration, prevalent convenience, and consistent incorporation. As a component of its method, the Company keeps on growing its stage for the revelation and conveyance of outsider digital substance and applications through the iTunes Store (Apple Inc, 2014). The Company's procedure likewise incorporates building and extending its own retail and online stores and its outsider conveyance system to viably reach more clients and give them a great deal and post-deals bolster experience. The Company accepts consistent interest in innovative work ("R&D"), promoting, and publicizing is basic to the improvement and offer of imaginative items and advances (Edwards, 2010). Apple has built up a one of a kind notoriety in the industry and has a devoted client base for reasons as assorted as its advertising campaigns as well as its philosophy of attractive gadget designs. The organization believes that a superb purchasing background enormously improves its capacity to pull in and hold clients (Shaughnessy, 2015). The organization's products have dependably been intended to be on the ball contrasted with its associates. Apple has succeeded in making interest for its items, giving the organization control over costs through item separation, inventive publicizing, guaranteed brand steadfastness, and buildup around the dispatch of new items. Additionally, the company makes use of retail strategy known as “minimum advertised price” which prevents dealers or resellers from offering the company’s products at a given minimum price. The company enforces this strategy through the marketing subsidies it offers to dealers and resellers. Despite the cheapest products being priced at the mid-range, the company ensures that features that will offer a high and satisfying user experience (Edwards, 2010) accompany the high prices. Through its high quality hardware and unique user interface, Apple has been able to provide its clients with a lot of value for the prices. Another strategy employed by apple is vertical integration. This involves having control over the manufacturing process, following strict software standards and operating in a closed ecosystem Apart from allowing the company to have tight control of its component costs, the strategy allows Apple to have substantial control of its value chain. The Current financial situation of Apple In its financial results for the third quarter of fiscal 2015, Apple attained a profit of £10.7 billion and revenues up to $49.6 billion. The company sold 4.8 million Macs, 47.5 million iphones and 10.9 million Ipads. The quarterly net profit and revenues were above the company’s estimates for the third quarter of fiscal 2015. Apple estimates that for the fourth quarter of fiscal 2015, the revenues will be between $49 billion and $51 billion and that the operating expenses will be between $5.85 billion and $5.95 billion (Macworld, 2015). The key sources of Apple’s financial information include the company’s balance sheet, the cash flow statement, and the income statement. The company’s fiscal years ends in September, meaning that the financial statements of one specific years represents one quarter in the previous years and three quarters in the previous years (Apple Inc, 2014). Apple’s share price chart Figure 1: Apple’s Share price Apple’s stock market value now standards at of $710.8 billion. This value is more than the company’s top rival Microsoft Corporation. From the chart, it is clear that the company’s stocks have been fluctuating between significant movement to the upside and correction to the downside. It is clear from the above chart that the company’s share price is flattening. Product lifecycle The following figure shows apples product lifecycle Figure 2: Product lifecycle stages Apple’s stage Apple’s product lifecycle is at the maturity stage. Using the dividend yield formula, it is clear that the company’s sales revenues are related to the share price and the product lifecycle. The dividend yield formula is: . Dividends are derived from net profits Net profit=Gross profit-Express-Tax, Gross profit=Sales revenue Revenue generated by each major business area Apples divide its major business areas are divided according to the different products the company manufactures and markets. The product lines are divided into iPad, iPhone, Mac, iTunes as well as iPods. These products can be collectively grouped into three distinct categories namely mobile devices, computing hardware and software and the iTunes store (JinJin, 2013). The company has been generating increased revenues over the past three for most of its products. However, revenues for products such as the iPod and iPad have been on the decline. The following table summarizes the revenues generated in all the major business areas from 2012 (Apple Inc, 2014). Table 1: Summary of the revenues generated in all the major business areas 2012 2013 2014 iPhone 101,991 91,279 101, 991 iPad 30,283 31,980 30,283 Mac 24,079 21,483 24,079 iPod 2,286 4,411 2,286 iTunes, software and services 18,063 16,051 18,063 Accessories 6,093 5706 6093 TOTAL 182,795 170,910 182,795 The following figure provides more detailed information concerning the company’s net sales by product as well as operating segments. Figure 3: Apple’s net sales by product as well as operating segments. Source: Apple Inc form 10K , 2014 From the above figure, it is evident that the percentage change in the company’s net sales across the different operating segments as well as across the different products is on the decline. This is an indicator the company’s market share is on the decline. The company’s market share in America, Europe and Asia is being challenged by competitors such as Samsung, HTC and Sony. The decline in the revenues from the iPhone, apples main revenue earner, means that the company’s ability to make profits in future is under threat. Impact of strategic decisions Apple’s strategic direction The strategy that a business employs reflects the characteristics of the organization leadership. The strategy that Apple employed during the time of Steve Jobs is quite different from the approach that the current leadership lead by Tim Cook employs. Under Steve Jobs, the company’s focus was on the differentiation strategy. During unveiling of new products, Steve Jobs used to rely on rare appearances before analysts as well as the press. Additionally, the business strategy and goals were rarely discussed (JinJin, 2013). However, Tim Cook employs a different approach in that he is willing to discuss the company’s strategy and future plans. Under the new leadership, the company is also moving towards expansion of its innovation portfolios. The company has launched many different projects in addition to the traditional business areas. These include the iWatch, car automation systems, apple television, as well as home automation. Apart from that, the company seems to be moving towards unveiling of more than one version of its iPhones. Its latest mobile device, the iPhone 6 comes in different models that vary with size and prices. Another strategic direction that the company is taking is expanding into emerging markets. The company is gradually promoting its products, especially the iPad and the iPhone in emerging markets such as Brazil. The company has also maintained these products at the center of the company’s business plan and hopes that by the popularity of its products will be maintained through greater penetration into the emerging countries (JinJin, 2013). Mission statement, vision, and corporate objectives Apple’s mission statement and vision also reveals the company’s corporate objectives. One of Apple’s core objectives is to expand into emerging markets and expanding its customer base. The company hopes to increase the number of customers utilizing its products, especially the iPhone and the iPad. The company hopes to achieve this objective by expanding its distribution network. Some of the tactics the company is using include setting up of flagship stores in emerging markets, utilization of third party retail stores as well as internet sales. The company also aims to become the global leader in the mobile and computing industry. It aims to achieve this status through various strategies including research and development as well as monitoring the activities of its competitors (Farfan, 2015). Apple Company does not have a published mission statement. What is widely believed to be the company mission statement is highlighted in the company’s website. According to this statement, the company aims at producing the most outstanding products that will give its consumers a value for their money. Additionally, the statement outlines the different range of products that the company deals in. It also highlights the innovative role of the corporation and the role of the company in the future of the mobile and computing industry. This mission statement is quite different from that envisioned by the former CEO and founder Steve Jobs. His mission statement during his time as the head of apple was "To make a contribution to the world by making tools for the mind that advance humankind." Steve Job was convinced that the company’s products played an essential role in improving the quality of life (Farfan, 2015). The five-year record for the major balance sheet items According to Bloomberg business (2015), the company’s debt as a percentage increased over the last fiscal year. However, the company’s operating profits are adequate to service the current debt levels. Bloomberg Business points out that the current liquid assets available to the company are not enough to meet the present obligations. The Company’s accounts receivables have also been worsening over the past five years despite the constant increase in amounts over the same period. Total cash and short-term investments also fell between the 2013 fiscal year and the 2014 fiscal year. Between 2011 and 2014, the total current assets have been on an increase. However, the current assets dropped from $ 73, 286 million in 2014 to $ 68, 531 million in 2014. The total assets have also been increasing over the past four years. The increase in the total liabilities has been accompanied by a similar increase in the total assets over the past five years. However, the total equity fell between the 2013 fiscal year and the 2014 fiscal years despite an increase in the other years. The following figure shows the company’s five year record of major balance sheet items. Figure 5: Apple’s five year record of major balance sheet items Source: Morning Star, 2015 Review the director's highlights This are the highlights from Apple’s Q3 2014 financial results for the quarter ended 28th June 2014. The total revenue for the quarter ended 28th June 2014 was $37.4 billion The company sold over 35 million iPhones, which was a new 3Q record Year over year earnings per share went up by 20% Year over year Mac sales also went up by 18% It was reported that that was a high demand for portables The company reported that the iPad accounted for 80% of tablet based purchases The company also recorded a total revenue of $ 4.5 billion from iTune software and services How the strategic decisions have Impacted Apple's finances Apples financial ratio analysis An analysis of Apples financial statements and ratios will indicate whether the company is healthy or not. A healthy company has the ability to maintain its financial growth, strong asset and healthy financial ratios. The following table summarizes the company’s financial ratios over the past four years. Figure 5: Apple’s financial ratios over the past four years. Source: nasdaq.com The company’s financial statement shows that the company’s performance is declining. Compared to most of its competitors, the company’s collection period is relatively shorter. Between 2010 and 2012, the company sales growth rate was above 30%. However, the sales growth rate drastically fell in 2013 to 9% and in 2014 to 7%. The decline in the growth rate in the 2013 and 2014 fiscal year is quite understandable as the tablet and iPhone markets saw a shift in their growth levels from the explosive stage to a moderate one (Cardenal, 2015). The following figure shows the company’s profitability over the last one decade. Figure 7: The company’s profitability over the last one decade Source: Morning Star, 2015 From the figure, the company’s financial situation is fairly good. Both the return on equity and return on investment are higher than the level they were ten years ago. However, the percentage return on investment has flattened out in the past three years after taking a sharp decline 2013. Current ratio The current ratio measures the ability to pay obligations with the company’s assets. Apple’s current ratio has been on the decline over the past four years, from 161% in 2011 to 108% in 2014. The decrease in the current ratio over the past four years is an indicator that the speed of current asset growth is slower than that of the current liability growth. Quick ratio Quick ratio measures the company’s short-term liquidity. Compared to 2011 when the quick ratio was 158%, apples quick ratio declined to 105% in 2014. However, a slight increase of up to 168% was in achieved 2013. This means that the company’s ability to meet its short-term obligations declined between 2011 and 2014 (NASDAQ, 2015). Cash ratio Cash ratio measures the amount of cash and cash equivalents against the company’s current liabilities. It is also an indicator of a company’s liquidity. Apple’s cash ratio fell from 93% in 2011 to 73% in 2012. This was followed by an increase to 93% in 2013 after which the ratio took a dip to 40% in 2014 (NASDAQ, 2015). The following figure summarizes the company’s cash flow ratio over the last ten years Figure 8: Apple’s cash flow ratios Source: Morning Star, 2015 The percentage growth in the operating cash flow was relatively lower in 2014 compared to the levels in 2005. Growth has decline in the last five years, but this could be explained by the fact that the firm is in its maturity stage. The positive cash flow ratios indicate that the business is able to generate enough cash to run its operations Profitability ratio Profitability ratios can be categorized into two major groups namely those that measure earnings as a percentage of sales and those that measure profitability over capital. The profitability ratios that fall in the first category include the gross margin ratio and the operating margin ratio (Mrak-Blumberg, Renery & Bundgaard, 2006). Those that fall in the second category include return on equity and return on assets. Compared to Apples main competitor Samsung, Apples performance across the entire profitability ratios is superior. Compared to 2011, the Return on equity has increased to 35% while both the gross margin and the operating margin have taken a slight decline (NASDAQ, 2015). Future prospects of Apple Apples history over the past four years reveals that the company’s growth has stagnated. Revenue and profits are slightly lower. However, the company has been able to maintain its position as one of the market leaders, thanks to its strong market mix, great customer support and a loyal customer base. The company has also been strengthening its position as the most valuable company in the world, with its stock prices increasing by over 40% over the last one year. The company relies on the iPhone as the main source of revenue. The iPhone accounts for approximately 60% of the company’s revenue. With increasing competition from other mobile manufactures such as Samsung, HTC and Sony, over-reliance on iPhone sales may pose a great challenge in the future. Revenues from the iPhone have been growing by over 50% over the last years. However, revenues from other products have taken a slight dip (Team, 2015). To maintain its position as the most valuable company, apple has to come up with more innovative products and strategies that will ensure that it does not rely on only one business area for most of its revenues. Some of the areas the company looks to dominate include smart watches, car automation systems as well as mobile payment (Yarow, 2015). Free cash flow is the amount of cash that a business generates and which is available for the business to distribute among the company’s security holders. Over the past five years, the company cash flow has been increasing. The amount has increased from $ 16, 474 million in 2010 to $ 69, 359 billion in 2014. From the analysis of the company’s cash flow, it is clear that the value is likely to increase over the next couple of years. The constant increase in the free cash flow could have come about as a result of the increasing stock prices as well as the firm’s strengthening its position as the most valuable firm. Discount rate Weighted Average Cost of Capital (WACC) WACC measures a business’s cost of capital. It measures the average cost of raising money from different sources of finance. When calculating WACC, all sources of business finance are included in the calculation. WACC = R = (1 – Tax Rate) x R debt (D/D+E) + R equity (E/D+E) (1 – Tax Rate) x R debt (D/D+E) + R equity (E/D+E) As of June 2014: Tax Rate = 26.22% Cost of Debt (before tax) or R debt = 2.4% Cost of Equity or R equity = 6.69% Debt (Total Liabilities) for 2014 or D = $85.810 billion Stock Price = $628.66 (June 2, 2014) Outstanding Shares = 861.38 million Equity = Stock price x Outstanding Shares or E = $541.515 billion Debt + Equity or D+E = $627.325 billion WACC= (1 – .2622) x .024 x ($85.810 /$627.325) + .0669 ($541.515 /$627.325) .7378 x .024 x .1368 + .0669 x .8632 .0024 + .0577 = 6.01% It can thus be stated that as of June 2014, the company was incurring a cost of 6.01 cents on every other dollar it financed Apples prospects Through the company’s corporate strategy as well as its vision and mission statement, it is clear that apple aims to remain relevant in the market. The Company’s future lies in the development of new lines of products as well as the strengthening of the current line of products, especially iTune software and services. The iPhone remains the most profitable product line for Apple. The iPhone will most likely remain the company’s leading product line over the next few years. Apple’s key competitors have also increased their focus on research and development. Competition is likely to become stiffer over the next few years, and this would have an impact on the company’s market share as well as profitability. The company has to come up with new strategies including development of new products as well as expansion into different market segments In order to maintain profitability in the future. Currently, the company is not doing enough to develop new products. The company’s financial situation is quite stable and promises to remain this way over the next years. Future cash flow The following figure shows Apple’s cash flow in 2013 and 2014. Figure 9: Apple’s cash flow in 2013 and 2014 2013(million) 2014(million) Operating cash flow 53,666 59,713 Capital expenditure (9,076) (9,813) Free cash flow 44,590 49,900 Source: Bloomberg Free cash flow shows the amount of cash that the company actually holds and which can be paid back to shareholders. From the figure above, Apple’s free cash flow increased between 2013 and 2014. Therefore, the company is in a better position to pay its shareholders. From the above data, we can predict that the company’s free cash flow will increase over the next five years. An increase in free cash flow over the next five years would mean that the company will be in a better position to fund its operations and pay its shareholders. This would place the company in a better position. The following table summarizes the expected levels of free cash flow over the next five years. Figure 9: Apple’s expected levels of free cash flow over the next five years Year Operating cash flow Capital expenditure Free cash flow 2013 53,666 (9,076) 44,590 2014 59,713 (9,813) 49,900 2015 55,842.3 2016 52,492.2 2017 69,934.2 2018 78,262.3 2019 87,582.2 Source: Bloomberg References Apple Inc,. (2014). 2014 form 10-k (1st ed.). Washington DC: United States Securities and Exchange Commission. Apple Inc,. (2015). Apple. Apple. Retrieved 25 August 2015, from http://www.apple.com/ Bloomberg Business,. (2015). APPLE INC (AAPL:Consolidated Issue Listed on NASDAQ Global Select ): Financial Statements - Businessweek. Businessweek.com. Retrieved 25 August 2015, from http://www.bloomberg.com/research/stocks/financials/financials.asp?ticker=AAPL Cardenal, A. (2015). Apple Stock Financial Ratio Analysis: What You Need to Know (AAPL). Fool.com. Retrieved 25 August 2015, from http://www.fool.com/investing/general/2014/10/22/apple-stock-financial-ratio-analysis-what-you-need.aspx Edwards, C. 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