Abstract

Apple Inc. is seen as a flagship firm and model company by many (Bergvall-Kåreborn and Howcroft,
2013). At its peak in 2012, it had the largest market capitalisation in the world allowing it to wield
considerable market influence (Montgomerie, 2013).

Lazonick, Mazzucato and Tulum (2013) said a business model is the interaction of a company’s strategy,
finance and organisation thus I will interrogate the business model of Apple Inc through the three
segments of strategy relating to its product market, how it finances it's operations through the capital
market and manages the capabilities of its people within the organisation. I shall first use data from the
company's financial statements to review the performance of each segment before analysing the firm's
interaction within the segment.

Lastly, I will also consider the future of the Apple Business Model and what improvements may be
required to meet future challenges.

Product Market
Using data from recent years, I shall first review the performance of Apple products before discussing the
strategy Apple employs in the product market.

According to Apple (2013), Apple Inc line-up of hardware devices include the iPhone, iPad, Mac, iPod
and Apple TV. Software includes iCloud, iOS and OS X operating systems. Apple also sells and delivers
digital content and applications through the iTunes Store, App Store, iBook Store, and Mac App Store. Its
products are sold worldwide (xxx,).

Overview of product performance.

 The following chart shows Apple product performance in terms of sales figure over the last 5
years. (Source: Apple Financial Statements.)
 Net Sales by Product
100000
Dollars in Millions

80000
Sales for iPhone
60000
Sales for iPad
40000
Sales for iPod
20000 Sales for Mac
0
2009 2010 2011 2012 2013

 The following chart shows Apple product performance in terms of units sold over the last 5 years.
(Source: Apple Financial Statements.)

Units Sold by Product

200000

150000
In Thousands

Units for iPhone

Units

100000 Units for iPad

Units for iPod
50000
Units for Mac
0
2009 2010 2011 2012 2013

We can see from the above 2 charts that the sales of iPhone has been explosive since 2010, making it the
top selling product for Apple. iPad sales has been going very well too, especially from 2011 to 2012
where it saw an increase of 61% in net sales and 80% in units sold, however, from 2012 to 2013, the net
sales increased only by 3% while units sold by 22%. Sales of iPod has been declining year on year with
units sold and net sales dropping by more than 20% from 2012 to 2013. Performance for Mac has been
consistent and stable through the past five years, saw increases from 2009 to 2011 before a slight decline
from 2012 to 2013.

 The following chart shows an overview and comparison of Apple Net Sales, Cost of Sales and
Gross Margin over the last 5 years. (Source: Apple Financial Statements.)
 200000

150000
$ in Millions

Net Sales
100000
Cost of Sales
50000 Gross Margin

0
2009 2010 2011 2012 2013

Apple net sales have increased dramatically from 2010 to 2013. The increased gross margin was mainly
from improved leverage on fixed costs from higher net sales. The gross margin percentage in 2013 was
37.6%, 43.9% in 2012, 40.5% in 2011, 39.4% in 2010 and 40.1% in 2009. The decrease in gross margin
in 2013 compared to 2012 was driven by multiple factors including introduction of new versions of
existing products with higher cost structures and flat or reduced pricing, a shift in sales mix to products
with lower margins, introduction of iPad mini with gross margin significantly below average product
margins (Apple, 2013).

 The following charts show the products share of net sales over the past 3 years. (Source: Apple
Financial Statements.)

iTunes,
2011 Product share of Net Sales
softwares and
Accessories
13%

Mac iPhone
20% 42%

iPad
iPod 18%
7%
 iTunes,
softwares 2012 Products Share of Net Sales
and
Accessories
11%
Mac
15%
iPod iPhone
4% iPad 50%
20%

2013 Products share of Net Sales

iTunes, softwares
and Accessories
13%
Mac
12%
iPod
3% iPhone
iPad 53%
19%

The chart shows the increasing importance of iPhone as a product to the Company’s revenue as it
provides over half of all net sales in 2013. iPod in comparison has declined significantly perhaps due to
the integrating of iPod functions into iPhone and iPad thus cannibalizing iPod sales.

 Apple manages its business primarily on a geographic basis. The following chart show the
operating segments share of net sales over the past 3 years. (Source: Apple Financial Statements.)

2011 Net sales by Operating Segment

Retail
13%

Rest of Asia Pacific

9% America
Japan 35%
5%

Greater China Europe

12% 26%
 2012 Net sales by Operating Segmenttle
Retail
12%
Rest of Asia Pacific
7%
Japan America
7% 37%

Greater China Europe

14% 23%

2013 Net sales by Operating Segment

Rest of Asia Pacific

7% Retail
12%
Japan America
7% 37%
Greater
China
15% Europe
22%

The chart shows increased contribution from the Greater China region to total net sales while Europe
region share of total net sales has declined. During 2013, the domestic and international net sales
accounted for 39% and 61%, respectively, of total net sales.

Analysing Apple's Product Market Interaction

Apple has its roots as a computer company but its current business strategy encompasses far more
products than just its Mac line of personal computers (PC). The sale of iOS platform devices such as the
iPad, iPhone and iPod accounted for 76% of Apple’s revenue in 2011 (Bergvall-Kåreborn and Howcroft,
2013: Naughton, 2012). The success of these products and the potential of platform-based digital
ecosystems means Apple now places more importance to such mobile communication devices than its
traditional PC offerings. The success of Apple's product can be attributed to two main factors. The ability
to 'own the consumer' and the ability to both create and capture high value.
Montgomerie (2013) argued that the turning point for Apple business model came in 2003 when Apple
managed to control both hardware and content through the integration of iPod and iTunes music store.
This multichannel platform allowed Apple to 'own the consumer'. By ensuring content is only usable
within Apple devices, consumers are locked in via high switching cost should they choose to change
platforms, switching cost only increases as consumer builds up content through digital download.

Consumer demand allows Apple to exercise control over its supplier, retailers and third party app
developers. This leads to high value creation and capture.

Suppliers such as Foxconn International Holdings (FIH) depends on Apple for up to 50 percent of their
revenues (Haslam, Andersson, Tsitsianis, & Yin, 2013). Apple uses its tremendous leverage over its
suppliers to not only exert downward pressure on prices, leading to lower profits and margins but also to
enforce strict control of product information and instant responses to production requests. This allows
Apple to have huge product launches without having to maintain large and costly inventories.

Consumer electronics retailers are willing to give special galleries for Apple products because of high
consumer demand and higher margins which in effect is increasing the effectiveness Apple reach out to
consumers without adding new retail stores.

 Below chart is 3rd Quarter 2013 Smartphone Market Share.

(Source: http://www.idc.com/getdoc.jsp?containerId=prUS24442013)

Although Apple is dwarfed by Android's market share, as a percentage of total online sales, purchases
from iOS devices were five times higher than Android's (Yarow, 2013). Third party developers are drawn
to Apple's lucrative platform and continues producing applications (app) which increases the value of
Apple profitable hardware devices. Apple takes a 30 percent cut from app sales and in-app advertising
revenue. Apple benefits from not having to pay the labor costs of developers and loses nothing if an app
does not sell but profits handsomely if successful.

It is clear that Apple is able to translate consumer demand into revenues by externalising manufacturing,
sales and R&D costs to others while retaining a large portion of increasing sales.
Capital Market
The means to financing a company's strategy lies in its use of equities and debts. I shall examine Apple's
capital structure by focusing on its ability to generate returns and the sustainability of its debts.

Some key financial ratios:

(Source: Apple Financial Statements.)

Apple's short term liquidity

Year Current Ratio
2009 1.636500363
2010 2.011292346
2011 1.608437612
2012 1.495848685
2013 1.678638508

Apple's long term solvency

Year Debt to Equity Ratio
2009 50.1%
2010 57.3%
2011 51.9%
2012 48.9%
2013 67.6%

The current ratio and debt to equity ratio shows that Apple is more than capable in meeting its short term
and long term obligations. The sharp increase in debt to equity ratio in 2013 is due to Apple first ever
issuing of $17.0 billion of notes with varying maturities through 2043 and the use of cash to repurchase
shares.

Apple's Profitability on Sales

Year Net Profit Margin
2009 19.2%
2010 21.5%
2011 24%
2012 26.7%
2013 21.7%

From 2009 to 2012, Apple has increased its net income for every dollar of revenue it earned, indicating
better control over its cost over the years. Reduced net income of $41 billion in 2012 to $37 billion in
2013 is the cause of reduced profitability.

Apple's Profitability on Investment

Year Return On Assets
2009 17.3%
2010 18.6%
2011 22.3%
2012 23.7%
2013 17.9%

Year Return On Equity

2009 26%
2010 29%
2011 33.8%
2012 35.3%
2013 30%

Apple's profitability and efficiency with which capital is employed

Year Return on Capital Employed
2009 32.6%
2010 33.8%
2011 38.2%
2012 40.2%
2013 30%

ROA, ROE and ROCE all steadily increased from the year 2009 to 2012, with a sharp decline in 2013.
Reduced net income reduced the returns Apple could generate given the increased equity base. It is worth
noting that Apple's decision to take on $17 billion of long term debt and also repurchasing its shares may
be due to such a situation. If Apple did not increase its debt to equity ratio, reduce cash from assets and
reduce its equity levels, the ratios would have been even worst. Indicating to investors that Apple was
failing to generate returns for shareholders.

Apple's Stock Performance

 Chart for Industry Comparison for Apple Stock, assuming $100 was invested in each. Including
reinvestment of dividends (Source: Apple Financial Statements.).
 Industry Comparision
600 APPL
500
400 S&P 500 Index
300
200 S&P Computer Hardware Index
100
0 Dow Jones US Technology
2008 2009 2010 2011 2012 2013 Supersector Index

 Chart for Earnings Per Share – Diluted (Source: Apple Financial Statements.)

EPS - Diluted
60
In Dollars

40
20 Series1

0
2009 2010 2011 2012 2013

For the past decade, Apple stock has been a star performer. It has beaten all major indexes and its EPS
(Diluted) has soared. Indicating the confidence investors puts into Apple. Apple's decision to raise cash
through issuing bonds came at a good timing as US interest rates remains low, costing Apple only around
$300 million in annual interest expenses while it's net income for 2013 is $37 billion. The use of debt also
comes cheaper as its tax deductible and reduces the cost of capital for Apple's capital structure.

Analysing Apple's Capital Market Interaction

Late founder and CEO Steve Jobs had little if any interest in distributing earnings to public shareholders
(Lazonick, Mazzucato & Tulum 2013). Apple under Jobs used what Lazonick and O’Sullivan (2000) has
called a “retain-and-reinvest” strategy in funding their business. 2012 was the first year that Apple
distributed dividends to shareholders since 1996. In April 2013, Apple announced plans to distribute $100
billion in cash to shareholders: $40 billion in cash dividends and $60 billion in stock repurchases. It is
largest single stock repurchase program in history. 2013 was also the year when Apple tapped the debt
market for the first time in its history and raise $17 billion. Recent events seemed a sharp departure from
Apple previous approach to capital market strategy. Under Jobs, profits were seen as a vital source of
financial commitment for innovative investment strategies, not an objective of the firm (Lazonick,
Mazzucato & Tulum 2013). The reasons for such actions will be discussed in detail in later section of this
report.
Apple's phenomenal growth has allowed it to accumulate an enormous cache of liquid assets. In fiscal
2013, Apple has $73 billion in current assets and $106 billion in long-term marketable securities, a huge
leap from just five years ago in fiscal 2009 Apple had just $36 billion in current assets and $10 billion in
long-term marketable securities. Its retained earnings increased from $19 billion in 2009 to $104 billion in
2013. Showing investors the confidence Apple puts in its business.

Organisation
Organisational integration of employees from a wide range of functional specialties and different
hierarchies was a key factor in the development of Apple's technologies and innovative products
(Lazonick, Mazzucato & Tulum 2013).

 Apple’s organisation chart while Steve Jobs was CEO

(Source: http://tech.fortune.cnn.com/2011/08/25/apples-core-who-does-what/)
Apple's approach to integration was unconventional in every way. Apple as a company is very much
influenced by its late founder and CEO Steve Jobs (Isaacson, 2012), the way he micromanaged Apple led
to a decision model that is much centralised. Adam Lashinsky (2012) described in his book Inside Apple,
how Jobs ran marketing, oversaw product development, launched products and was the primary
spokesman for Apple. Jobs initiated, ratified, implement and subsequently monitor the development of
the iPhone which showed how decision management and decision control was fused at Apple.

To attract talents, employee stock options became an important component of remuneration and
performance rewards, especially for a Silicon Valley firm like Apple. However, by exercising stock
options when share price soar, executives and key employees can become rich enough to retire (Lazonick,
2009). This is disruptive to organisational integration and reduces the firm's competitive advantage.
Therefore, Apple along with other companies like Microsoft has ceased to use stock options to reward
employees except for senior executives. Instead, Apple have implemented new retention mechanisms
such as “Blue Sky,” which allows employees to work on their own favourite projects on company time
(Leading Company, 2012),

Moving Forward
Apple is an admirable company. It's Business Model has been highly successful for the past decade
(Lehman and Haslam, 2013). However it is not without Achilles heels. I shall highlight some key
challenges Apple will have to tackle, moving forward.

Apple has been highly successful in creating and capturing value from its global supply chain and third
party content deliverers such as application developers. Its ability to exercise control over suppliers
however is threatened by several issues. A supplier such as Foxconn already has low margins and is a
target of human rights groups due to hash working conditions. There is a limit to how much Apple can
drive down prices from FIH and still expect its consumers to ignore the labour disputes (Froud, Johal,
Leaver and Williams, 2012). Apple may have to provide help to its suppliers to stabilise financially and
improves their public image (Haslam, Andersson, Tsitsianis, & Yin, 2013). One of Apple's responses is
spending $10.5 billion recently on robots to shore up its supply chain (Satariano, 2013).

Apple spends just 2 percent of sales in R&D and apps development compared to 10-15 percent reported
by Apple’s peers. Crowd sourcing enables Apple to externalise such costs to third parties. The key to
crowd sourcing is the lucrative Apple platform which draws developers to it. Apple will have to maintain
consumer demand and spending on app purchases while ensuring new multi-platform technologies such
as HTML5 does not derails Apple's ability to 'own the consumer'. This can be done by targeting segments
of consumers who spends more on app purchases such as gamers.

The concept of shareholder value served to reinforce the Agency Theory of corporate governance
(Lazonick and O'sullivan, 2000). Shareholders believed the maximisation of shareholder value meant
allocating returns to increase shareholders assets ought to be the priority of corporate managers which
should they fail to deliver will be disciplined by market mechanisms such as takeovers. However such
pressure by shareholders of the firms meant that instead of a 'retain and reinvest' strategy of yesteryear,
corporate managers started to pursue a 'downsize and distribute' strategy. Companies even resort to share
repurchases to boost their stock price (Lazonick, 2013) Through their stock options compensations,
executives are prime beneficiaries of this action (Lazonick, 2009).

Activist Hedge funds managers using the shareholder concept have been hovering around Apple like
vultures, hoping to take a slide of its enormous cash reserves (Lazonick, Mazzucato & Tulum 2013).
Apple seemed to have bowed to such pressures when they announced their plans to distribute $100 billion
in cash to shareholders through dividends and share repurchases. This is an unwise move. Dividends
rewards shareholders for holding the stock, repurchases rewards them for selling the stock (Lazonick,
2009). Activists shareholders ignore the fact that by retaining and reinvesting the money rather than
taking it outside the system, Apple can then better compete and provide long term returns to investors
(Lipton, 2013).

Conclusion
The phenomenal success of the Apple Business Model isn't just down to the vision and marketing skills of
late founder and CEO Steve Jobs. Strategic vision alone does not bring forth innovative products,
financing the innovation process and organisation learning form the interaction that generates returns
(Lazonick, Mazzucato & Tulum 2013),

Lashinsky (2012) liken Apple inner workings to a mobilisation for war. Strong control over its products,
finances and organisation helped propel Apple to unprecedented success and translate higher sales into
higher net income. The decline of Apple will likely come from a weaken interaction between the three.

References
Apple (2011). Form 10K (Annual Report). Cupertino. Apple Inc. Available at:
http://investor.apple.com/financials.cfm (Date Accessed: 7th January 2014).

Apple (2012). Form 10K (Annual Report). Cupertino. Apple Inc. Available at:
http://investor.apple.com/financials.cfm (Date Accessed: 7th January 2014).

Apple (2013). Form 10K (Annual Report). Cupertino. Apple Inc. Available at:
http://investor.apple.com/financials.cfm (Date Accessed: 7th January 2014).

Bergvall-Kåreborn, B., & Howcroft, D. (2013, December). The Apple business model: Crowdsourcing
mobile applications. In Accounting Forum (Vol. 37, No. 4, pp. 280-289).

Satariano. A (2013). Apple's $10.5B on Robots to Lasers Shores Up Supply Chain. Bloomberg. Available
at: http://www.bloomberg.com/news/2013-11-13/apple-s-10-5b-on-robots-to-lasers-shores-up-supply-
chain.html (Date accessed: 12th January 2014).
Froud, J., Johal, S., Leaver, A., & Williams, K. (2012). Apple Business Model: Financialization across
the Pacific (No. 111). CRESC Working Paper Series, Working Paper.

Haslam, Andersson, Tsitsianis, & Yin. (2013). Apple’s financial success: The precariousness of power
exercised in global value chains. Accounting Forum, 37(4), 268–279.

IDC (2013). Press Release. Available at: http://www.idc.com/getdoc.jsp?containerId=prUS24442013

(Date accessed: 11th January 2014)

Isaacson, W. (2012). The real leadership lessons of Steve Jobs. Harvard Business Review, 90(4), 92-102.

Lashinsky, Adam. (2012) Inside Apple: how America's most admired-and secretive-company really
works. New York: Business Plus, 2012. Print.

Lazonick, W. (2009). The explosion of executive pay and the erosion of american prosperity. Entreprises
et Histoire, 57, 141–164.

Lazonick, W. (2010). Innovative business models and varieties of capitalism: Financialization of the US
corporation. Business History Review, 84(4), 675.

Lazonick, W. (2013). The Financialization of the US Corporation: What Has Been Lost, and How It Can
Be Regained. Seattle University Law Review, 36(2), 857

Lazonick, W., Mazzucato, M., & Tulum, Ö. (2013). Apple's changing business model: What should the
world's richest company do with all those profits?. In Accounting Forum (Vol. 37, No. 4, pp. 249-267).

Lazonick, W., & O'sullivan, M. (2000). Maximizing shareholder value: a new ideology for corporate
governance. Economy and society, 29(1), 13-35.

Leading Company. (2012). iPerks: Apple, like others, takes steps to woo employees. In Leading
Company. , 21 November.

Lehman, G., & Haslam, C. (2013). Accounting for the Apple Inc business model: Corporate value capture
and dysfunctional economic and social consequences. In Accounting Forum (Vol. 37, No. 4, pp. 245-
248).

Lipton, M. (2013). Bite the Apple; Poison the Apple; Paralyze the company; Wreck the economy.
Memorandum, Wachtell, Lipton, Rosen, and Katz., 26 February 2013, available at:
http://blogs.law.harvard.edu/corpgov/2013/02/26/bite-the-apple-poison-the-apple-paralyze-the-company-
wreck-the-economy/ (Date Accessed 15th January 2014)

Montgomerie. (2013). Owning the consumer – getting to the core of the Apple business model.
Accounting Forum, 37(4), 290–299.
Yarow, J (2013). Apple's iOS Completely Blew Away Google's Android For Shopping On Christmas.
Available at: http://www.businessinsider.com/ios-android-shopping-2013-12 (Date Accessed: 14th
January 2014)