Apple Computer, Inc. Annual Profit Plan

MNGT 3280Alex Milovic

Introduction History of Innovation Many changes over the last 20

years New Direction

iPod iTunes OS X Operating System

                                                                                                                                

Situation Analysis Strengths

Brand Name: Known for Innovation Steve Jobs: “Forward Thinking” Market leader in MP3 Sales (59% market share) Market leader in legal music downloads (62% market

share) Cupertino, CA plant: in-house production Large amount of cash reserves ($6.5 billion) Apple on-line store, retail stores

Situation Analysis Opportunities

OS X operating system is currently only available on Macintosh computers

OS X only has a 5% market share in operating systems market

Downloading only represents 2% of overall music sales

Situation Analysis Weaknesses

Many bad strategies over the last 20 years Only a 3% market share in computer sales Do not have the resources to compete head-to-head

with Microsoft

Situation Analysis Threats

OS X vs. Microsoft Napster Paying for downloads vs. piracy Licensing arrangements with music companies                             

MissionOur goal is to provide innovative computer

products(both hardware and software) to consumers of all ages through retail stores, online stores and through our Apple retail locations.

Objective Continue success of iPod line iTunes vs. Napster Launch OS X on all computer platforms

Operating SystemsMarket Size 2004 $55 billion

Projected 2005 $63.525 billionOperating Systems (2004 Market Share)

85%

5%

10%

Windows

OS X

Other

Operating Systems (Projected 2005 Market Share)

81%

10%

9%

Windows

OS X

Other

MP3 PlayersMarket Size 2004 $2.37 billion

Projected 2005 $5.7 billion

MP3 Players (2004 Market Share)

59%

41% iPOD

Other (Dell,Gateway, etc)

MP3 Players (2005 Projected Market Share)

70%

30%

iPOD

Other

Downloaded MusicMarket Size 2004 $1.61 billionProjected 2005 $3.765 billion

Downloaded Music (2004 Market Share)

62%

38%iTunes

Other

Downloaded Music (2005 Projected Market Share)

iTunes

Other

Competitive Analysis OS X Operating System Microsoft

Windows Apple iPod Dell Pocket DJ, Samsung,

Gateway Apple iTunes Napster, Walmart

Potential Variable Margin (per unit)

Cost Price VM OS X (Panther) $287.99 $399.99

$112.00 iPod 143.99 199.99 56.00 iTunes 0.10 0.99

0.89

Competitive/Pricing/Promotions Strategies:

OS X Offensive Strategy Windows security has been an issue Failure to come out with updated Windows Develop separate application of software

compatible with non-Macs

iPod/iTunes Defensive Strategy Block Napster’s attempt to gain market share

through subscription service Promote the iPod and iTunes as package Develop subscription service for iTunes

Product Features OS X

Increased security iLife program

bundle iWork program

bundle Frequent update

availability

iPod Several available

versions iPod iPod photo iPod mini iPod shuffle iPod U2 special

edition

Promotions/Distribution Strategies and Supporting Action Plans:

Partner with PC leader (Dell, IBM, eMachines, etc.) to offer OS X as primary operating system

Sold through major retail chains (Best Buy), Apple retail stores, online store

Targeted to consumers with focus toward age 15-50

Promotion of iLife and iWork Heavy promotion of new subscription service

for iPod and iTunes to counter Napster

Product Promotions Timeline Q1 2005:

Continue to focus on iPod advertising Print advertising: Sports Illustrated, Maxim, People,

Popular Science, Us Weekly, Runner’s World, Men’s Health

Product review in Consumer Reports Television Advertising: CBS, NBC, ABC, FOX, UPN,

WB, MTV, VH1, ESPN, TechTV, CNN, Lifetime, Oxygen, E! Entertainment

Sales force begins to sell iPods to more retail outlets

Promotions Timeline (cont.) Q2 2005

Begin advertising new iTunes subscription plan through above media

Begin advertising OS X operating system Print Advertising: PC Magazine, PC World, Computer

Edge, Computer Weekly, Computer World Product review in Consumer Reports Television Advertising: CBS, NBC, ABC, FOX, TechTV,

CNN, Bloomberg, Lifetime, E! Entertainment, Headline News, TBS

Sales force meets with retailers to propose iPod/OS X plan (reduced cost of OS X when iPods are purchased)

Promotions Timeline cont. Q3 2005

Increase advertising of iPod and OS X Q4 2005

Continue to advertise during Christmas season

Meeting between Senior Marketing and International Business interests concerning international promotion/distribution of OS X and iPod in 2006

Distribution Timeline Q1 2005:

Sales reps continue to sell iPod line to retailers Senior marketing secures shelf space for

newest lines of iPods Q2 2005

Sales reps begin to discuss OS X/iPod package Senior marketing meets with Dell management

to discuss adding OS X to online store

Distribution Timeline (cont.) Q3 2005

Sales force makes preliminary Christmas orders; communicates with Operations to ensure demand will be met

Q4 2005 Sales force makes additional

Christmas orders as necessary

Operations New Product:

OS X Operating System

Innovated Existing Product: iPod

Manufacturing/Suppliers We will add extra equipment in our

Cupertino, CA plant, as well as increase labor

Since our supply demands will increase, we must make sure our materials are available for production

OS X Timeline Q1 2005:

Design and final testing of the OS X software is complete Operations Managers and labor are hired and trained to mass

produce the new OS X Operating System Q2 2005:

Accommodations are made in the plant and additional machinery is in place to begin production

Production of OS X begins Q3 2005:

Marketing completes product design and software is ready to be packaged

Meetings between marketing and key retailers used to determine ordering

OS X is shipped by truck fleets to retailers and stocked on retailer’s shelves, ready for the 2005 Christmas season

Online retailers are also stocked and ready to sell Q4 2005:

Product is sold through retailers

iPod Timeline Q1 2005:

Production of iPods continues in order to meet orders Production begins on newest iPod lines

Q2 2005: Meet with Product team to discuss future iPod products,

meet with operations management to discuss production needs of new lines

Use current forecasts to project Q3 and Q4 sales, see if we can meet demand

Q3 2005: Use retail pre-order forecasts to guide production schedule

for Q3 and Q4 Begin 24/7 schedule to increase production

Q4 2005: Continue to process orders Begin production of new iPod lines for 2006

Quality Control ISO 9002- quality in procurement,

production, and installation

Six-Sigma - reduces our overall defect rate

Repair/Technical Support We outsource our repair and

technical support programs Mac Service - repair work and

training. Technical support is available online

and at our Apple retail locations

Shipping/Retailers Shipping

Online customers - United Parcel Service Retailers - outsourced trucking fleet

Retailers OS X - sold everywhere computers are sold

Packaged with Dell iPod

Department stores, Discount stores, Music stores, our website

Income Statement September 2004 September 2005 % of sales % of sales Sales $8,279 100% $13,000 100% CGS 6,020 73 9,300 71.5 Gross Margin 2,259 27% 3,700 28.5% Fixed costs: SGA $1,421 17% $1,700 13.1% R/D 489 5.9 750 5.7 Other 23 .2 36 2.7 Subtotal Fixed $ 1,933 23% $ 2,486 19% EBIT $ 326 3.6% $ 1,214 9.3% Interest/Other 57 .6 77 .5 EBT $ 383 3.9% $ 1,291 .09% Tax Expense 107 1.2 361 2.7 Earnings after tax $ 276 3.3% $929 7.1%

Balance Sheet

September 2004 September 2005 Assets: Cash $ 2,969 $ 3,500 Receivables 1,005 1,290 Inventory 101 180 Other 2,980 3,046

Sub-Total Current Assets $ 7,055 8,016 PPE $ 707 1,250 Other 288 630 Sub-Total Fixed Assets $ 995 $ 1,880 Total Assets $ 8,050 $ 9,896 Liabilities and Equity Liabilities Accounts Payable $ 2,680 $ 3,635 Sub-Total Current Liabilities $ 2,680 3,635 Deferred Income Tax $ 294 $ 291 Long Term Debt 0 0 Total Liabilites $ 2,974 3,926 Equity Common Stock $ 2,514 $ 3,100 Retained Earnings 2,670 3,000 Other (108) (130) Total Equity $ 5,076 $ 5,970 Total Liabilities and Equity $ 8,050 $ 9,896

Key Ratios

2004 2005

Current Ratio 2.63 2.21

Operating Income ROI 4% 12%

Total Asset turnover 1.03 1.31

Debt Ratio 0% 0%

ROE 5% 16%

ROA 3% 9%

Return on Invested Capital 6% 19%

Revenue and Gross Margin iPod/iTunes: 4.38 Billion OS X: 6.05 Billion Other: 2.57 Billion Total Sales: 13 Billion Gross Margin: 28.5%

1.5% increase from 2004Factors: more favorable pricing on certain

commodity components, higher revenue which provided for strong leveraging of fixed production costs and a more favorable mix of direct sales.

Fixed Costs R/D: $750 Million

34.8% increase from 2004

5.76% revenue SG&A: $1700 Million

16.4% increase from 2004

13.1% of revenue

Total: $2.45 Billion

Source: cash, equivalents, and short-term investments

Why: to ensure a continuing and timely flow of innovative and competitive products and technologies to the marketplace

Net Profit 2004: $276 Million 2005: $929 Million

236.5% increase in Net Profit

19% return on invested capital

9.4% return on assets

0100200300400500600700800900

1000

Net Profit

20042005