1. Introduction
The main purpose
of this report is to analyse the business model adopted by Apple Inc. so as to analyse
and understand the financial statements of various international businesses. Apple
Inc. being the world’s most famous and richest
company is very well-known firstly for its CEO Steve Jobs, secondly for its
successful iOS products mainly iPhone and iPad and latest addition is the
attention it got for its soaring stock price, which even after dropping by 63%
in March 2013 gave Apple highest market capitalisation as compared to any other
company in the world (The Institute for New
Economic Thinking 2013). This
report will certainly be helpful in finding out the factors which help in
contributing towards the success of the Apple Inc. as successful international
brand.
2. Background Information of Apple
Apple Inc. was
being founded by Steve Jobs as a co-founder in 1976, which became an incorporated
organization in 1977. The company trades in NASDAQ stock markets. It is considered
to be the largest enterprise in terms of market capitalisation. The market
capitalisation of Apple was $330.8 billion in August 2011, when it overtook
Exxon Mobil.
In terms of its product design the Apple Inc.
is considered to be highly vertically integrated, as it markets and retails
across its 357 Apple Stores spread in 11 countries along with online stores in
89 countries across the globe. Apple Inc. also earns money from foreign
exchange hedging. Thus in total there are five operating segments and 8
strategic business units (SBU’s) within Apple which can be seen from the Table
1 shown below:
|
Operating Segments
|
Countries Included
|
SBUs
|
|
Americas
|
North and South America
|
·
Desktops
·
Portables
·
Other music related products and services
·
iPods
·
iPhone and related products and
services
·
Peripherals and other hardware
and software, service and other sales
·
iPad and related products and services
|
|
Europe
|
European countries, Middle East and Africa
|
|
|
Japan
|
|
|
|
Asia-Pacific
|
Australia and Asian countries
|
|
|
Retail
|
Apple Retail Stores
|
|
|
|
|
|
|
|
|
|
|
|
|
3. Apple’s Business Model
While evaluating
the business model of Apple it is better to think it in the terms of pre-1996
era and post-1996 era. Prior to 1996 the company had mainly focussed
exclusively on the personal computers just in the Macintosh line and it
occasionally thought of foraying into innovative products like the Newton. But
with Steve Jobs rejoining the company in 1996 the Apple’s mission grew beyond
personal computing and it forayed into products like iPhone, iPad and iPods (Lazonick & Mazzucato 2013).
By applying the
theory of innovative enterprises the relationship between the changing business
model of Apple and its economic performance has been analysed in this report. A
business model mainly entails an interaction of strategy of a company, finance
as well as organization. With the help of company strategy the organization
chooses the product through which it competes along with finalising the
processes through which the company will produce these products (Lazonick 2013). Through organization the
enterprise is able to mobilise the capabilities of its people in hierarchical
as well as functional division of labour mostly going beyond the firms boundaries,
in order to convert the purchased inputs into sold outputs. Finance is the factor
which helps the organization to sustain the whole process of transformation
until it started delivering financial returns.
Thus in the theory of innovative enterprise a combination of strategy, organization as well as finance is
being generated so as to create higher quality products at lower unit costs than they are previously available in the
markets (Lazonick 2010). Since its start-up Apple was
famous for same old things like visionary leader, however in the interim period
there were many vital changes in its business model like the interaction between
strategy, organizational and finance which sets the stage for analysing and
clearly knowing the company’s phenomenal growth over the past few decades. After
the death of Steve Jobs, his successor Timothy D. Cook, CEO, there have been
certain very important changes in the business model of Apple which suggest the
innovative capabilities more prominently of Apple.
The Business
model Canvas of Apple can be visualised form the figure shown below:
The business
model canvas of Apple Inc. consists of main nine building blocks which help in
focussing the attention on the key business attributes and these nine building
blocks are: key Partners, key
Activities, key Resources, value propositions, customer relationships, customer
segments, channels, cost structure and revenues streams (Noren 2013).
4. Course of Growth of Apple
The phenomenal success
of Apple can be seen from its end of fiscal 2012 when it had $121 billion liquid
assets. This included $10.7 billion of cash and cash equivalents, $92.1 billion
in long-term marketable securities along with $18.4 billion of short term
marketable securities (Apple Inc. 2013).
In April 2013 Apple Inc. was committed towards distributing around $100 billion
to its shareholders in cash dividends as well as stock buybacks by the end of
2015. From the risk-reward perspective there is no justification for this kind
of distribution to the shareholders of Apple. The only period when Apple Inc. raised
capital from its public shareholders through its IPO’s. Thus over its 37 years
history it is seen that the main value
creators for Apple have been its employees and suppliers along with several government
agencies who have planned to invest in the
critical technologies of Apple.
5. Factors
Contributing towards its being Successful International Brand
The impact of mobile device line of Apple
cannot be understated as can be seen from the above graph. It clearly indicates
that the iPhone and iPad make the highest or rather biggest share of Apple’s
profit pool and help in generating the biggest revenue and profit margin for
company. The main factor behind the success of Apple worldwide has been better
design and innovation which are not tied to specific business model; rather it
is organizations willingness to adopt various business models has made it an
international success. The company mainly believes in the philosophy of disrupting
and designing. Like the Apple iPhones disrupted the whole cell phone industry
by not creating better cell phone rather it developed better internet devices
which made cell phone look like dumb and cheap. Same story it repeated with the
iPads too.
Some exclusive
strengths of Apple which make it as success worldwide are: it is the largest
organization across the globe in terms of market capitalisation, which also
shows high level of vertical integration. Apple is a very strong brand with
highly skilled and experienced executive team. The business model and the
supply chain are very strong of the organization. The marketing strategy is also highly
effective. It also has healthy profitability ratios, high cash balance and zero LT debt. The financial analysis of
Apple shows the main revenue generators for the company are iPhone and iPads
which account for 43% and 19% of total sales in 2011. The leading operational
segments in 2011 were US and Europe, accounting for 35% and 26% of total
revenue in 2011. The only segmented which had year-to-year growth was
Asia-Pacific with 8% growth from 2010.
Profitability
analysis of Apple for 2011 shows that its
sales grew by 340.43% from
2007-2011, while the net profit rose by
huge figure of 641.69%. ROCE was also
boosted in 2010-2011 by 13.12%as there was an overall increase of 84% in NPBIT
as a series of new stores were opened which boosted sales. Liquidity and efficiency analysis shows that the quick ratios and current ratios improved from
2.4 to 2.7 times in 2007 and 2009, and the
ratio declined in 2010 and 2011 to 2.0
and 1.6 times respectively. Strong cash flows of Apple indicate strong economic
value and allow greater financial freedom to the company.
6. Accounting Framework of the Country of Origin of Apple
The country of
origin of Apple Inc. is USA, where all the accounting standards are being
developed as well as maintained by FASB. The Financial Accounting Standards
Board (FASB) is the body in US which provides full access the Accounting Standards
Codification for US GAAP in the form of an authoritative source (ICAEW 2014).
The FASB Accounting Standards Codifications were being launched in the year
July, 2009, which superseded all the prior accounting standards of non-Securities
and Exchange Commission (SEC).
FASB is the national organization which is responsible for establishment as well as maintaining the
accounting standards for the entities or
organizations which are non-governmental. This is unique body which improves the effectiveness of disclosures in
the form of notes to the financial statements. It provides measures for providing more decision-useful
information about financial instruments (FASB 2013). The main focus is to increase the
transparency as well as comparability between organizations . FASB has
celebrated 40th anniversary as the US accounting standards setting body.
On December 23rd, 2013 FASB and the
Private Company Council (PCC)issues a
diecion-0making framework for the
makers as well as users of the private company financial statements. This final
update no. 2013-12 ,: Private Company Decision-Making Framework: is a guideline
which helps in evaluating the Financial
Accounting and Reporting of the Private
companies . This is helpful for FASB and PCC to find out that in which and
whether under certain circumstances it is correct to adjust the financial reporting requirements for the private companies ,
while following the US Generally
Accepted Accounting Principles (GAAP) (Bramwell 2013).
This framework
for decision-making would be used by FASB and PCC accompanied with the
existing FASB conceptual framework for financial reporting to make cost-benefit
evaluations as well as user relevance for
the private companies. There are five primary
factors which differentiate the
financial reporting considerations of
public organizations from private companies and they are: the number
of primary financial statement users as
well; as their access to management, accounting resources, investment strategies of primary users, ownership and capital structures, and manner in which the preparers know about the
guidelines of new financial reporting.
The business
model of Apple has been reported quite widely as it has been a trend of outsourcing the technology components
manufacture , but Apple adopted
digital content external sourcing which
lead to the success of Apple’s business model. Apple opened its platform to the
3rd party IT developers, which helped in leveraging its expertise
for supplying the applications. This caused the dominance of Apple in the
mobile market and a business model
emerged in which the
internet-enabled mobile devices have been weaved together with the digital content, within a
closed ecosystem. Crowdsourcing helps
Apple to source development in effective manner, capitalizing on the mass
production of digital products, which also helps it in managing and sidelining the
incurred costs as well as responsibilities which come along while applying
highly-skilled tech workforce (Bergvall-Kåreborn
and Howcroft 2013).
Even the report
of Independent Registered Public
Accounting Firm mentions in the Auditor’s Report of Apple Inc. that the Board of directors as well as Shareholders of Apple Inc. audited
the consolidated balance sheets of Apple
Inc. for 2011, and 2010 (Rich et al. 2011).
The consolidated statements of operations, cash flows as well as shareholders equities
for all the three years in the period ending September 24th, 2011
have also been studied and audited by the Board members and shareholders as per
FASB standards. All the audits have been conducted as per the standards of the
Public Company Accounting Oversight Board of US. According to these standards the
board of Directors and shareholders of
Apple Inc. should plan and then conduct
audit so as to obtain reasonable assurance regarding whether these financial statements are devoid of any kind of material misstatement or not. The audit
conducted by Ernst & Young LLP does an examination, that too on test basis,
providing evidence which supports the amounts as well as disclosures in the
financial statements. It also covers the accounting principles used along with
the significant estimates which have been made by the management. The financial
statements of Apple Inc. according to Ernst & Young LLP audit are fair in
all material aspects and give a consolidated position of Apple Inc. along with
its results about Apple’s operations and cash flows as per US generally accepted
accounting principles (Rich et al. 2013).
Bibliography
Apple Inc (2013) Apple more than doubles capital
return program, 23 April, [Online], Available: http://www.apple.com/pr/library/2013/04/23Apple-‐More-‐than-‐ Doubles-‐Capital-‐Return-‐Program.html [7 January 2014].
Bergvall-Kåreborn, B.
and Howcroft, D. (2013) 'The Apple Business Model: Crowdsourcing mobile
applications', Science Direct, December.
Bramwell, J. (2013) Final
US GAAP Framework for Private Companies Issued by FASB and PCC, 23
December, [Online], Available: http://www.accountingweb.com/article/final-us-gaap-framework-private-companies-issued-fasb-and-pcc/222907 [8 January 2014].
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'Innovative Business Models and Varieties of Capitalism: Finanacialization of
US Corporation', Busienss History Review, vol. 84, no. 4, pp. 675-702.
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Corporate Change, vol. 4, p. 22.
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Mowen, M. and Hansen, D. (2013) Cornerstones of Financial Accounting,
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World’s Richest Company Do with All Those Profits?, 10 September,
[Online], Available: http://ineteconomics.org/blog/institute/apple-s-changing-business-model-what-should-world-s-richest-company-do-all-those-prof [7 January 2014].
Appendix A: Ratio calculations and formulae used 969
INCOME STATEMENT - $m
2011 2010
2009 2008 2007 2006
Net Sales 108,249
65,225 42,905 37,491 24,578 19,315
Cost of Sales 64,431 39,541 25,683 24,294 16,426 13,717
Gross Profit 43,818
25,684 17,222 13,197 8,152 5,598
Operating Profit 33,790 18,385 11,740 8,327 4,407 2,453
(NPBIT)
Interest Income
519 311 407 653 394
Other income -104 -156 -81 -33 599
-29
/ (expense)
Profit before Tax 34,205 18,540 12,066 8,947 5,006 2,818
Tax 8,283 4,527 3,831 2,828 1,511 829
Net Profit 25,922 14,013 8,235 6,119 3,495 1,989
BALANCE SHEET - $m
2011 2010 2009 2008
2007 2006
Receivables 5,369 5,510 3,361 2,422 1,637 1,252
Inventory 776 1,051
455 509 346 270
Current Assets 44,988 41,678 31,555 30,006 21,956
14,509
Current Assets- 44,212
40,627 31,100 29,497
21,610 14,239
Inventory
Payables 14,632 12,015
5,601 5,520 4,970
3,390
Current
Liabilities 27,970 20,772
11,506 11,361 9,299
6,471
Total Equity 76,615 47,791
31,640 22,297 14,532
9,984
LT Liabilities 11,786 6,670
4,355 2,513 1,516
750
Total Assets 116,371 75,183
47,501 36,171 25,347
17,205
Total Assets- CL
88,401 54,411
35,995 24,810 16,048
10,734
Purchases 64,156 40,137
25,629 24,457 18,233
CASH
FLOWs - $m
From 2011 2010 2009
2008 2007
Operating
Activities 37,529 18,595
10,159 9,596 5,470
Investing
Activities -40,419 -13,854 -17,434
-8,189 -3,249
Financing
Activities 1,444 1,257 663 1,116 739
Net Cash Flow -1,446 5,998 -6,612
2,523 2,960
Cash at year end
9,815 11,261
5,263 11,875 9,352
RATIOS
2011 2010
2009 2008
2007
PROFITABILITY
Gross Profit
Margin 40.5% 39.4% 40.1%
35.2% 33.2%
Net Profit
Margin/ROS 31.2% 28.2% 27.4%
22.2% 17.9%
Y on Y Sales 166% 152.0% 114.4%
152.5% 127.2%
Inc/ (Decr) % 66.0% 52.0%
14.4% 52.5% 27.4%
ROCE 38.22%
33.79% 32.62% 33.56% 27.46%
LIQUIDITY
Current Ratio 1.6
2.0 2.7 2.6 2.4
Quick Ratio 1.6 2.0 2.7 2.6 2.3
Debtors Days 18.1 30.8 28.6 23.6 24.3
Creditors Days 83.2 109.3
79.8 82.4
99.5
EFFICIENCY
Asset Turnover 1.2 1.2
1.2 1.5
1.5
Stock Turn Days 4.4 9.7
6.5 7.6
7.7
INVESTORS
Gearing - - - -
-
EPS (dollars)
$
28.05
$
15.41
$
9.22
$
6.94
$
2.36
Appendix B: Segment Analysis
SEGMENT ANALYSIS
Net
Sales - $m 2011 2010 2009 2008
Americas 38,315 24,498 18,981 16,552
Europe 27,778 18,692 11,810 9,233
Japan 5,437 3,981 2,279 1,728
Asia-Pacific 22,592 8,256 3,179 2,686
Retail 14,127 9,798 6,656 7,292
Total 108,249 65,225 42,905 37,491
Operating Profit - $m 2011 2010 2009 2008
Americas 13,538 7,590 6,658 4,901
Europe 11,528 7,524 4,296 3,022
Japan 2,481 1,846 961 549
Asia-Pacific 9,587 3,647 1,100 748
Retail 3,344 2,364 1,677 1,661
Total 40,478 22,971 14,692 10,881
Net
Sales by Product - $m 2011 2010 2009 2008
Desktops 6,439
6,201 4,324 5,622
Portables 15,344
11,278 9,535 8,732
Total Mac Net Sales 21,783 17,479
13,859 14,354
iPod 7,453
8,274 8,091 9,153 Other music related 6,314
4,948 4,036 3,340
products and
services
iPhone and
related 47,057
25,179 13,033 6,742
products and
services
iPad and related
products and services 20,358 4,958
0 0 Peripherals and other hardware 2,330 1,814 1,475
1,694 Software, service and
other sales 2,954 2,573
2,411 2,208 Total Net Sales 108,249 65,225 42,905 37,491
Unit Sold by Product - 000 units 2011 2010 2009 2008
Desktops 4,669 4,627 3,182 3,712
Portables 12,066 9,035 7,214
6,003
Total Mac Net
Sales 16,735 13,662 10,396
9,715
iPods 42,620 50,312 54,132
54,828
iPhones 72,293 39,989 20,731
11,627
iPads 32,394 7,458 0 0
Total units sold 164,042 111,421 85,259
76,170
SEGMENT ANALYSIS
Net Sales % by
Operating Region 2011 2010 2009
2008
Americas 35%
38% 44%
44%
Europe 26%
29% 28%
25%
Japan 5%
6% 5%
5%
Asia-Pacific 21% 13% 7%
7%
Retail 13%
15% 16%
19%
Total 100%
100% 100% 100%
Operating Profit % by Operating Region 2011 2010 2009 2008
Americas 33%
33% 45%
45%
Europe 28%
33% 29%
28%
Japan 6%
8% 7%
5%
Asia-Pacific 24%
16% 7%
7%
Retail 8%
10% 11%
15%
Total 100%
100% 100% 100%
Net Sales % by Product 2011 2010 2009
2008
Desktops 6%
10% 10% 15%
Portables 14%
17% 22% 23%
Total Mac Net
Sales 20%
27% 32% 38%
iPod 7%
13% 19% 24%
Other music
related products and services 6% 8% 9%
9%
iPhone and
related products and services 43%
39% 30% 18%
iPad and related
products and services 19% 8% 0%
0%
Peripherals and
other hardware 2% 3%
3% 5%
Software,
service and other sales 3%
4% 6% 6%
Total Net Sales 100% 100% 100% 100%
Average Selling Price per Product Unit Sold
- $ 2011 2010 2009 2008
Desktops 1,379
1,340 1,359
1,515
Portables 1,272
1,248 1,322
1,455
Total Mac Ave.
Selling Price 1,302
1,279 1,333
1,478
Net Sales per iPod unit sold 175 164 149
167
Net Sales per
iPhone unit sold 651
630 629
580
Net Sales per
iPad unit sold 628
665 n/a
n/a
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