This Document Contains Cases 23 to 26 Apple Computer – 2011 Forest David A. Case Abstract Apple is a comprehensive strategic management case that includes the company’s year-end 2010 financial statements, organizational chart, competitor information and more. The case time setting is the year 2011. Sufficient internal and external data are provided to enable students to evaluate current strategies and recommend a three-year strategic plan for the company. Headquartered in Cupertino, California, Apple’s common stock is publicly traded under the ticker symbol AAPL. Apple’s newest iPhone has spurred a revolution in cell phones and mobile computing. Even though founder and CEO Steve Jobs has recently died, Apple continues to innovate its core Mac desktop and laptop computers -- all of which feature its OS X operating system -- including the iMac all-in-one desktop and MacBook portable for the consumer and education markets, and the high-end Mac Pro and MacBook Pro for consumers and professionals involved in design and publishing. Apple has been immensely successful with its digital music players (iPod) and online music store (iTunes). The company’s iPad tablet omputer could become another revolutionary technological breakthrough. Apple gets more than half of its sales from outside the US. B. Vision Statement (proposed) To be the most innovative computer, phone, and tablet company in the world. C. Mission Statement (actual) Apple Computer is committed to protecting the environment, health, and safety of our employees (9), customers (1) and the global communities (3) where we operate. We recognize that by integrating sound environmental, health, and safety management practices into all aspects of our business, we can offer technologically innovative products (4) and services while conserving and enhancing resources for future generations (6). Apple strives for continuous improvement in our environmental, health and safety management systems and in the environmental quality (8) of our products, processes, and services. 1. Customers 2. Products or services 3. Markets 4. Technology 5. Concern for survival, growth, and profitability 6. Philosophy 7. Self-concept 8. Concern for public image 9. Concern for employees D. External Audit Opportunities 1. Corporate demand for PCs is increasing. 2. Asia-Pacific sales increased 5.6% in first quarter 2011 and are expected to grow 32 percent in 2011. 3. Shipments to the Middle East, Eastern Europe and Latin America are expected to grow 19 percent in 2011. 4. Consumers prefer phones and tables today to desk top PCs and laptops. 5. Business analytic service industry is still in the development phase. 6. The US malware infection rate is 58.25%. 7. PCs are still the best option for typing, spreadsheets, and activities that require more processing power. Threats 1. Hewlett-Packard is currently the #1 PC seller with 18.9 percent market share. 2. Competing firms using second and late mover strategies let Apple burden much of the R&D expense. 3. Acer and Lenovo based in Asia are impacting price and increasing their market share in the United States. 4. Oracle, SAP, and IBM are well entrenched in the business analytics service industry. 5. Rapid technology advancement in the industry. 6. Slowly an increase in viruses created for Apple products. 7. Slowdowns in the global economy. 8. Volatile nature of currency rates. Competitive Profile Matrix EFE Matrix E. Internal Audit Strengths 1. Apple has sold 20 million iPads since the products April 2010 debut. 2. Products include Mac, iPhone, iPad, iPod, Xserve and more. 3. Sells products through retail stores, online stores, and direct sales force. 4. Operate 233 retail stores in the US and 84 internationally. 5. In 2010, Apple’s market capitalization surpassed Microsoft. 6. Employ a first mover approach and considered the best first mover ever. 7. Sales in the Americas and Europe increased 29% and 58% respectively. 8. iPhone sales increased 93% in 2010. 9. Desktop sales increased 43% in 2010. 10. Inventory turnover of 70. Weaknesses 1. Lack a developed vision or mission statement. 2. Functional business structure. 3. Unwillingness to use debt to finance. 4. Products are the most expensive in their class. Financial Ratio Analysis Growth Rate Percent Apple Industry S&P 500 Sales (Qtr vs year ago qtr) 39.00 36.30 14.50 Net Income (YTD vs YTD) NA NA NA Net Income (Qtr vs year ago qtr) 53.70 54.40 47.50 Sales (5-Year Annual Avg.) 41.16 38.38 8.27 Net Income (5-Year Annual Avg.) 67.11 61.93 8.68 Dividends (5-Year Annual Avg.) NA NA 5.68 Profit Margin Percent Gross Margin 40.5 39.1 39.9 Pre-Tax Margin 31.6 29.9 18.1 Net Profit Margin 24.0 22.7 13.2 5Yr Gross Margin (5-Year Avg.) 38.8 37.3 39.8 Liquidity Ratios Debt/Equity Ratio 0.00 0.07 1.01 Current Ratio 1.6 1.6 1.4 Quick Ratio 1.6 1.6 0.9 Profitability Ratios Return On Equity 41.7 42.2 26.0 Return On Assets 27.1 25.8 8.9 Return On Capital 36.3 35.1 11.8 Return On Equity (5-Year Avg.) 36.2 37.2 23.8 Return On Assets (5-Year Avg.) 23.0 22.0 8.0 Return On Capital (5-Year Avg.) 31.9 31.2 10.8 Efficiency Ratios Income/Employee 429,172 401,304 126,213 Revenue/Employee 2 Mil 2 Mil 1 Mil Receivable Turnover 19.9 19.1 15.7 Inventory Turnover 70.5 68.0 12.4 Net Worth Analysis (in millions) IFE Matrix F. SWOT SO Strategies 1. Build two new plants in India for the sole production of Powerbooks and Desktop machines at $400M each (S9, O1). 2. Produce a new iPhone every 6 months (S8, O4). WO Strategies 1. Publish a pubic vision and mission statement stressing desk top units as a vital part of the business (W1, O1). ST Strategies 1. Increase R&D by $300M (S6, T2). 2. Design automatically updating virus protection for all Apple products (S5, T6). WT Strategies 1. Switch to a SBU structure (W1, T7). 2. G. SPACE Matrix H. Grand Strategy Matrix I. The Internal-External (IE) Matrix Segment 2010 Revenue (millions) Desktops $6,201 Portables 11,278 iPod 8,274 Music related 4,948 iPhone 25,179 iPad 4,958 Peripherals 1,814 Software 2,573 Total 65,225 J. QSPM K. Recommendations 1. Build two new plants in India for the sole production of Powerbooks and Desktop machines at $400M each. 2. Produce a new iPhone every 6 months. 3. Publish a pubic vision and mission statement stressing desk top units as a vital part of the business. 4. Increase R&D by $300M. 5. Design automatically updating virus protection for all Apple products at $100M. L. EPS/EBIT Analysis (in millions) Amount Needed: $1,200M Stock Price: $382 Shares Outstanding: 929 Interest Rate: 5% Tax Rate: 24% M. Epilogue Apple continues to post impressive financial results. The only minor issue for Apple in their fiscal Q4 2011 was slightly lower-than-expected iPhone sales, as many customers delayed purchases over rumors of an iPhone 5. Now that the iPhone 4S has been released, Apple sales are again surging. Apple's dominance in the tablet market may however come under pressure in 2012 since two of the largest computer manufacturers in the world, including Dell Inc., have begun working on new tablets that will run on Windows 8, Microsoft's newest operating system set to be released in the second half of next year. Apple’s net income for Q4 of 2011 that ended September 24, 2011 rose to $6.6 billion, or $7.05 per share, up 54 percent from a year earlier. Apple's sales rose 39 percent to $28.3 billion. The company's sales for its full fiscal year of 2011 were $108.2 billion -- a giant leap ahead of the $65.2 billion Apple raked in last year. As of November 1, 2011, Apple again edged out Exxon Mobil in the tight race to be the stock market's most valuable company in the world. In its Q4 2011, Apple sold more than 17 million iPhones, falling short of the previous two quarters' sales figures, as some consumers held out in anticipation of the new iPhone 4S. That's still impressive, however, considering the iPhone 4 had already been on sale for more than a year during the past quarter. Apple’s iPad and Mac both set sales records during the company’s fiscal Q4 2011. IPad sales rose to 11.1 million, and Mac sales soared 4.89 million -- the first time Apple has even sold more than 4 million Macs in a quarter. A recent Gartner survey of personal computer shipments showed that Apple's third-place PC market share is growing, nibbling away at No. 2 Dell. However, the company’s iPod continued to slump, with sales falling 27 percent to just 6.6 million units on Q4. That represented the fewest number of iPods Apple has sold in six years. Microsoft Corporation – 2013 Forest R. David A. Case Abstract Headquartered in Redmond, Washington, Microsoft is the world's largest software firm with its core product being the Windows PC operating system and Office business productivity application suite, sold in part through PC makers. Selling online and through resellers, Microsoft also designs and manufactures video game consoles (Xbox 360), enterprise applications (Microsoft Dynamics), server and storage software, and digital music players (Zune). With 90,000 employees, Microsoft also engages in online advertising and consulting services. CEO Ballmer at Microsoft has announced his retirement so Microsoft is searching for a new CEO. Founder and Chairman of the Board Bill Gates exercises substantial control over the Microsoft organization; Mr. Gates is one of the four people serving on the search committee to locate a successor to Mr. Ballmer. Mr. Gates is likely going to dominate this search process to the dismay of many shareholders. The search for a new CEO is being led by John Thompson, the company’s lead independent director. Mr. Gates’ stake in Microsoft has fallen to five percent, less than half its level of a decade ago, though he remains the company’s biggest individual shareholder. B. Vision Statement (proposed) To help people around the world reach their fullest potential by utilizing our excellent software, consulting services, and certification programs. C. Mission Statement (proposed) Microsoft is committed to providing the best operating systems (7), consulting services, certification programs and gaming consoles (2) in the world (3) to our customers (1). We are able to accomplish this vision by hiring only the most skilled employees (9) and providing them with cutting edge technology (4) which results in great products and services for our customers and great returns for our shareholders (5). Our philosophy is to connect the world through technology (6) while offering our products at fair prices for all (8). 10. Customers 11. Products or services 12. Markets 13. Technology 14. Concern for survival, growth, and profitability 15. Philosophy 16. Self-concept 17. Concern for public image 18. Concern for employees 19. D. External Audit Opportunities 1. Smartphone shipments by 2016 are expected to exceed 1,200 million units. 2. In 2012, China surpassed the USA as the world’s largest smartphone market, yet there are millions of untapped customers remaining in China. 3. Cloud services are expected to yield revenues of $100 billion in 2016, up from $40 billion in 2011. 4. High definition TVs and tablets of today are expected to soon lose market share to gadgets than can read human emotions and to eye gaze technology that will allow for automatic scrolling and opening of apps. 5. Improved technology allows for more web-based software products and applications. 6. Growing trend among firms to hire employees who have professional certifications. 7. Many firms now are competing on process and are in need of consulting services. 8. Growing middle class worldwide especially in Latin America, Eastern Europe, and Asia. 9. Many telecom providers in the USA will subsidize expensive phones if the customer signs a 2-year contract. Threats 1. Apple sold over 22 million iPads in Q4 of 2012. 2. Faltering PC market. 3. IBM has moved heavily into the consulting business with its acquisition of SPSS. 4. Google and other competitors are now offering web-based products that work much the same as MS Office products work. 5. Skype─ it is estimated that a large percentage of its customers come from emerging markets and do not have much money to spend. 6. Apple and Google operating system are the two most popular for smart phone users. 7. As the tablets video gaming experience increases and becomes closer to the experience on an Xbox, PlayStation or Nintendo’s market share for traditional gaming consoles may decline. 8. PlayStation controls 45% of the video game market share. 9. Piracy remains a problem in the software industry. 10. Competitive Profile Matrix All three firms above are fantastic companies with net income over $10 billion in 2012. Microsoft remains the leader based largely on their MS Office and Windows products. Google is a serious threat by creating a web based version to compete with MS Office; Microsoft badly lags Google in providing the operating system for smartphones. It is likely Google will have a higher score than Microsoft on the same CPM within 3 years. EFE Matrix The 2.34 reveals room for improvement for Microsoft on external issues. The firm needs to move to more web-based software, increase its market share in tablets & smartphones, and offer more certifications, moving forward. E. Internal Audit Strengths 1. MS is the world’s largest software company and had record revenues of $73 billion in fiscal 2012. 2. MS offers consulting services, cloud-based services, and training certifications, as well as online products such as Bing, MSN, adCenter, and Atlas. 3. MS owns Skype, has an alliance with Nokia, and recently introduced a Windows Phone, and a Windows tablet computer named “Surface.” 4. The Server and Tools Division offers developer tools, training and certifications. 5. The Server and Tools division revenues grew 12% from in year-end 2012. 6. Revenues outside the USA in 2012 accounted for 47% of total revenue. 7. MS is developing technologies that increasingly enable touch screen and voice to be more readily understood by PCs, tables and phones. 8. MS Office enjoys over 90% of the market share. 9. Firm is extremely healthy on most financial ratios. 10. Many PC makers such as Acer, Lenovo, Dell, Hewlett-Packard, and Toshiba pre-install MS software on devices. Weaknesses 1. Sales of MS’s new Surface tablet were fewer than 1 million in Q4 of 2012. 2. MS remains heavily reliant on Windows software sales as a percent of companywide revenue. 3. Consulting services only accounted for around 5% of total 2012 revenue. 4. Over $14 billion in goodwill on the balance sheet. 5. All divisions other than Server and Tools experienced slow growth or negative growth in 2012. 6. 90% of all revenues in the MS Business segment are derived from MS Office. 7. Xbox sales declined $113 million in 2012. 8. With the Skype purchase price of $8.5 billion, MS is in essence paying around $1,000 for each customer who is worth around $30 each. 9. No dedicated users. Apple users love to show that they are using Apple devices, but few are proud of using an MS device. 10. With virtually no debt, MS is not using debt in this low interest rate environment to its full advantage. Financial Ratio Analysis Profit Margin Percent Microsoft Industry Gross Margin 73.99 75.58 Pre-Tax Margin 34.75 35.06 Net Profit Margin 28.08 28.28 Liquidity Ratios Debt/Equity Ratio 0.16 0.24 Current Ratio 2.71 2.77 Quick Ratio 2.53 2.58 Profitability Ratios Return On Equity 30.09 28.41 Return On Assets 16.58 15.7 Return On Capital 24.9 22.77 Efficiency Ratios Income/Employee 220,838 123,791 Revenue/Employee 786,353 470,524 Receivable Turnover 4.68 6.27 Inventory Turnover 13.17 12.75 Asset Turnover 0.59 0.56 Microsoft is a healthy company performing well on most all financial ratios. Net Worth Analysis (in millions) Microsoft and Google are worth approximately the same using the 3 method average. However, using method number four (possibly a more accurate method), Google is worth about 16% more than Microsoft. IFE Matrix The 2.36 reveals room for improvement at Microsoft in addressing internal issues. Moving forward, the firm needs to allocate more resources to phones and consulting services as the firm remains too dependent on Windows and MS Office software. F. SWOT SO Strategies 1. Further develop MS certification programs (S2, S4, O6). 2. Invest $100 million to improve consulting services (S1, S2, O7). 3. Invest $200 million in advertising and marketing to promote the Windows phone in Latin America (S3, S6, O1, O8). 4. Form an alliance with telecom providers in the USA to help subsidize the prices of phones for customers who sign a two year contract (S1, S3, O9) WO Strategies 1. Spend $30 million to promote X-Box sales in Latin America (W7, O8). 2. Invest $200 million in advertising and marketing to promote the Windows phone in China (W1, O1, O2). 3. Invest $200 million in advertising and marketing to promote the Windows phone in Latin America (W1, W2, O1, O8). 4. Invest $100 million to improve consulting services (W3, O7). ST Strategies 1. Lower prices by 50% on the Surface tablet (S3, T1, T6). 2. Invest $100 million to improve consulting services (S1, S2, T3). 3. Further develop MS certification programs (S2, S4, T2, T4). WT Strategies 1. Lower prices by 50% on Surface tablet (W1, T1, T6). 2. Divest the X-box business line (W7, T7, T8). 3. Divest Skype (W4, W8, T5). 4. G. SPACE Matrix Microsoft is in the Aggressive Quadrant of the SPACE Matrix. It is important the firm expand consulting services as well as acquire market share in the smartphone market. SP scores of -6 on Technological Changes and Competitive Pressure will eventually erode into FP factors such as ROA and Net Income and move Microsoft into the Competitive Quadrant. H. Grand Strategy Matrix Difficult to place Microsoft in the Grand, as the PC market is experiencing slow market growth while smartphones are still growing rapidly outside the USA. Microsoft has a strong footing on traditional products and will likely remain here for the next few years, but desperately needs to shift resources to smartphone operating systems, consulting services, and professional certifications in order to maintain their position within the Grand. I. The Internal-External (IE) Matrix Segment 2012 Total Sales (in billions) 2012 Profits (in billions) Windows and Windows Line $18.4 $11.5 Server and Tools 18.7 7.4 Microsoft Business 24.0 15.7 Entertainment and Devices 9.5 0.4 Online Services (not used in IE calculations) 2.9 (8.1) Corporate Level Activity (not used in IE calculations) - (5.1) Totals $73.7 $16.9 Microsoft Business division continues to power the firm forward; however, with this segment consisting mostly of the popular MS Office package, it is at extreme risk of Google producing a popular web-based alternative. The Sever and Tools division consists of software such as SQL, Visual Studio and others, but also consists of training and certifications. There is a large external market for services such as these as revealed by the high EFE placement of this division. The firm should work to grow and build these services. Microsoft’s Entertainment division includes the X-Box and Skype. This division, while having a sustainable product line, faces extreme pressure from Sony and other video game manufacturers as well as from free video chat platforms online that affect the Skype line. It is possible this division should be divested as resources could be better allocated elsewhere, even though Skype was just purchased. J. QSPM Both options have approximately the same weighted scores, and with Microsoft’s capital position, both should be implemented. Microsoft desperately needs to allocate resources away from the traditional PC market. K. Recommendations 1. Invest $100 million to improve consulting services. 2. Invest $200 million in advertising and marketing to promote the Windows phone in Latin America. 3. Spend $30 million to promote X-Box sales in Latin America. 4. Invest $200 million in advertising and marketing to promote the Windows phone in China. 5. Lower prices by 50% on the Surface tablet. 6. Further develop MS certification programs for $200 million. L. EPS/EBIT Analysis (in millions expect for EPS and Share Price) Amount Needed: $730 Stock Price: $ 34.58 Shares Outstanding: 8,360 Interest Rate: 3% Tax Rate: 19% Debt financing is the most attractive for Microsoft given that it maximizes EPS, and the firm has a low debt/equity ratio. M. Epilogue In mid-June 2013, Microsoft announced that it is partnering with Best Buy to open 500 Windows Store locations inside Best Buy stores across USA. The strategy could help both companies but especially Microsoft, which was late to the game on tablets and smartphones, and its offerings -- the Surface and the Windows Phone have struggled. Microsoft has already dabbled into retail with its shops, kiosks, and pop-ups mainly dedicated to Surface tablets, but Windows Stores inside Best Buy stores will expand that model to include PCs from its original equipment manufacturer partners. The store-within-store will help Microsoft get its brand seen by electronics shoppers without the company having to make a big capital investments for stores. Also in June 2013, Windows Phone in the USA vastly improved its voice capabilities to improve the speed and accuracy of voice to text and voice search. Now when Windows Phone users compose a text message or search using voice, Bing will return results twice as fast as before and increase accuracy by 15 percent. Also in June 2013, Microsoft opened its newest retail store at Ala Moana Center in Honolulu, with the help of Seattle-based megastars Macklemore and Ryan Lewis and alternative group Neon Trees. More than 4,000 customers came out for the grand opening, some of whom camped out the night before to be the first ones in the door. Microsoft's new strategy and organizational structure is focused around integrated "devices and services" and championed by both Chairman Gates and CEO Ballmer. However, many analysts say this focus is bad for Microsoft; and that a new, visionary CEO is needed to help the company change course before it's too late. Microsoft in 2013 reorganized itself around devices and services. The move is somewhat unorthodox. Through introduction of its Surface tablet and its rollout of dedicated retail stores, Microsoft has been transforming itself structurally into something similar to Apple. Lenovo Group Limited – 2013 Forest R. David E. Case Abstract Headquartered in Beijing, China, Lenovo designs, produces, and markets personal computers, workstations, servers, electronic storage, IT management software, and other related products and services. The world’s second-largest PC vendor (behind HP), Lenovo markets the ThinkPad line of notebook computers and ThinkCentre line of desktops. With 26,300 employees, Lenovo sells directly to consumers and businesses, as well as through online sales, company-owned stores, chain retailers, and major technology distributors and vendors. On September 30, 2013, in the Research Triangle Park in North Carolina, Lenovo introduced four new all-in-one (AIO) desktop computers, including the super-widescreen Lenovo B750, which delivers the world’s first29” 21:9 display. According to the latest rankings from IDC, Lenovo is #1 in the worldwide consumer AIO market and the worldwide AIO market overall. All four new models are equipped with stunning IPS displays, including three B-series PCs and the Lenovo A530, a slim, space-saving feature. F. Vision Statement (actual) “To create personal devices more people are inspired to own, a culture more people aspire to join, and an enduring, trusted business that is well respected around the world.” G. Mission Statement (proposed) Dedicated to its customers (1) by building exceptionally engineered PCs and mobile Internet devices (2), Lenovo’s business is built on product innovation (4), a highly efficient global supply chain (7), and exemplary ethics (6). Innovative, hardworking employees (9) allow Lenovo to offer consumers worldwide (3) the most advanced technology (4) products, while minimally impacting the environment (8) and profitably growing for our shareholders (5). 20. Customers 21. Products or services 22. Markets 23. Technology 24. Concern for survival, growth, and profitability 25. Philosophy 26. Self-concept 27. Concern for public image 28. Concern for employees H. External Audit Opportunities 1. Differentiation of key parts (batteries, display, and storage) are some of the important features of a phone. 2. HP lost $12.6 billion in 2012. 3. Smartphone is still in the growth phase in many developing markets. 4. Increasing areas worldwide with free WiFi. 5. Apple focuses its business on consumers and does not aggressively develop products and services for global enterprise customers. 6. Apple lacks consistent global service and support on many products. 7. Customers prefer Android based operating systems to Windows. 8. The global smartphone market increased by 39% in 2012 in terms of units shipped, according to International Data Corporation. 9. Many smartphone providers in the USA will offer phones at reduced prices for customers signing 2 year contracts. 10. China is the world’s biggest market for mobile phones and PCs. Threats 1. Supplies can be undependable at times in providing supplies in the quantity needed. 2. Apple, Dell, HP, Toshiba and Fujitsu all reported higher sales in 2012/2013 than Lenovo. 3. Apple and Samsung dominate the smartphone market with a 80% market share. 4. The PC market is on the decline. 5. Apple’s inventory turnover was 74 in 2012. 6. Price wars are starting to emerge in the industry. 7. Windows operating systems for phones have not gained near the public popularity as Apple and Google based operating systems. 8. Microsoft is offering free software similar to Lenovo’s ThinkVantage software. 9. Lenovo is also concerned about China’s ZTE Corp., which plans to become one of the world’s top-three smartphone brands. 10. An increasing number of companies are interested in purchasing Mac computers for all or part of their global operations. Competitive Profile Matrix Lenovo is a rapidly growing company that still lags both Dell and Apple based on the CPM scores. However, as Lenovo grows and allocates more resources to smartphones, the firm will improve its position in the industry. EFE Matrix Lenovo’s performance is average in addressing external issues, but when compared to market giants Apple and Samsung, Lenovo is doing very well. Moving forward, the firm should allocate increased resources to the smartphone market rather than the PC market. E. Internal Audit Strengths 1. Strong sales position in China accounting for 43% of 2012 sales. 2. Rapidly growing firm with net income up from $129 million in 2010 to $631 million in 2013. 3. Lenovo has invested $793 million in the construction of a mobile phone manufacturing and R&D facility in Wuhan, China. Lenovo is the world’s second-largest PC vendor (behind HP), and markets the ThinkPad line of notebook computers and ThinkCentre line of desktops. 4. Lenovo ranks fourth in the global tablet market by volume. 5. In July 2012, the National Football League (NFL) announced that Lenovo had become the NFL's "Official Laptop, Desktop and Workstation Sponsor." 6. Lenovo acquired the Brazil-based electronics company CCE that sells products under the brand name Digibras for a base price of 300 million reais (US$148 million) in a combination of stock and cash and an additional 400 million reais dependent upon performance benchmarks. 7. The second-biggest smartphone vendor in China, Lenovo has begun selling smartphones in Russia, Indonesia, the Philippines and Vietnam. 8. Lenovo focuses on vertical integration in order to avoid excessive reliance on suppliers and to keep down costs. 9. Lenovo’s 1) China and 2) Europe Middle East and Africa sales increased 17% and 20% respectively in FY 2013. 10. Lenovo basically has what it calls a two prong strategy: 1) Protect its commercial global PC business and its China business; and 2) Attack three high growth opportunities in emerging markets with smartphones, tablets, and smart TV’s. Weaknesses 1. Mission statement is only one sentence long. 2. No COO and divisional by region when divisional by product may be more beneficial. 3. Lenovo is still primarily a Chinese PC company with 34% of all revenues coming from PC sales in China and 81% of all Chinese sales being derived from PCs. 4. Lenovo smartphones are not offered in Europe, USA, or Latin American markets. 5. About a tenth of Lenovo’s Q3 2013/2012 revenues came from its mobile Internet and digital home (MIDH) business - mainly consisting of its smartphone sales in China, which jumped 77% to $998 million, though that was only 11% of total revenue. 6. Europe Middle East and Africa segment reported $6.8 billion USD in sales but only $24 million in operating profits in 2013. 7. Sales in North America were $4,939 million in 2013, lower than any market served. 8. Inventory Turnover of 20 with Apple over 70. 9. Despite improving profits, the firm’s net income in 2013 was only $631 million. 10. Financial Ratio Analysis (in USD) Profit Margin Percent Lenovo Industry Gross Margin 11.58 22.71 Pre-Tax Margin 2.1 -0.7 Net Profit Margin 1.61 -1.59 Liquidity Ratios Debt/Equity Ratio 0.11 0.63 Current Ratio 1.02 1.11 Quick Ratio 0.76 0.73 Profitability Ratios Return On Equity 22.13 -6.79 Return On Assets 3.24 -1.69 Return On Capital 19.27 -3.54 Efficiency Ratios Income/Employee 17,756 -23,976 Revenue/Employee 1.09 Mil 374,575 Receivable Turnover 12.43 6.12 Inventory Turnover 20.23 14.46 Asset Turnover 2.02 1.06 Lenovo is doing well on most financial ratios when compared to the industry average. However, when compared to Apple’s Inventory turnover of 74 and Quick ratio of 1.54, there is room for improvement in managing inventory. Also, the firms ROE and ROA numbers badly lag top competitors who are more focused on smartphones than PCs Net Worth Analysis (in millions) Lenovo is a rapidly growing company but Apple has roughly 50 times the market capitalization of Lenovo. IFE Matrix The firm is doing well in managing internal resources but must start allocating increased resources to smartphones away from PCs. Also, an increased effort on the USA market is likely needed. F. SWOT SO Strategies 1. Build a new production plant for phones and tablets near the R&D facility in Wuhan, China for $600 million (S1, S2, S3, S4, S7, O8, O9, O10). 2. Form an alliance with Verizon and AT&T in the USA to provide smart phones (S2, S10, O8, O9). 3. Offer the equivalent of $20 off each phone for up to 1 million customers in Russia. (S1, S7, O3, O7, O8). 4. Devote $200 million to building relationships with large multinational companies around the world to supply their employees with smart phones (S1, S2, O5, O6). WO Strategies 1. Spend $20 million to restructure by product and hire a COO (W1, W2, O1, O8). 2. Invest 80% of all profits generated from PCs into R&D for tablets, smartphones, and next generation devices (W3, O3, O10). 3. Form an alliance with Verizon and AT&T in the USA to provide smart phones (W4, W7, O8, O9). 4. Spend $50 million to develop and offer cheaper products for customers in emerging markets (W4, W8, O3, O8, O10). 5. ST Strategies 1. Spend $150 million in advertising in China to market the advantages of Lenovo smartphones over rival XTE Corp. (S1, S3,T9). 2. Further increase the vertically integrated strategy to include batteries, display, and storage for $500 million in R&D (S3, S10, T1, T5). 3. Invest 80% of all profits generated from PCs into R&D for tablets, smartphones, and next generation devices (S8, S10, T4). WT Strategies 1. Further increase the vertically integrated strategy to include batteries, display, and storage for $500 million in R&D (W8, T1, T5). 2. Spend $200 million to develop top of the line phone for the European market that will yield higher profit margins (W6, T6). 3. Invest 80% of all profits generated from PCs into R&D for tablets, smartphones, and next generation devices (W3, T4). 4. Divest all software operations similar to what Microsoft is offering for free (W5, T8). 5. G. SPACE Matrix Lenovo is located in the Aggressive Quadrant of the SPACE Matrix, suggesting the firm needs to continue expansion into Latin America, continue its vertical integration strategies, and continue shifting resources to smartphones. H. Grand Strategy Matrix The smartphone market is rapidly growing, but the PC market is not, making it difficult to place Lenovo inside the Grand. If the firm continues to grow its smartphone business model, especially in China and then expanding more abroad, the firm should see continued sales growth. I. The Internal-External (IE) Matrix Segment 2012 Total Sales (in millions) 2012 Operating Profits China $14,539 $678 Asia Pacific/Latin America (APLA) 6,860 24 Europe/Middle East/Africa (EMEA) 7,535 147 North America 4,939 168 Total $33,873 $1,107 Net income was $631million in 2012, but not disclosed by segment, so operating profits were used for the pie slices. APLA region, while a strong income generator, is not operating nearly as efficiently as the other segments. North American sales remain weak and are mostly derived from PCs. J. QSPM Both strategies should be implemented and even though building the new production plant in China receives a higher score than securing relationships with Verizon and AT&T in the USA, it would be wise for Lenovo to first gain a commitment for the USA based telecom giants. K. Recommendations 1. Build a new production plant for phones and tablets near the R&D facility in Wuhan, China for $600 million. 2. Form an alliance with Verizon and AT&T in the USA to provide smartphones. 3. Offer the equivalent of $20 off each phone for up to 1 million customers in Russia. 4. Devote $200 million to building relationships with large multinational companies around the world to supply their employees with smart phones. 5. Spend $20 million to restructure by product and hire a COO. 6. Invest 80% of all profits generated from PCs into R&D for tablets, smart phones, and next generation devices. 7. Spend $50 million to develop and offer cheaper products for customers in emerging markets. 8. Spend $150 million in advertising in China to market the advantages of Lenovo smartphones over rival XTE Corp. 9. Further increase the vertically integrated strategy to include batteries, display, and storage for $500 million in R&D. 10. Divest all software operations similar to what Microsoft is offering for free. 11. L. EPS/EBIT Analysis (in millions of $ expect for EPS and Share Price) Amount Needed: $1,700 million Stock Price: $21.11 Shares Outstanding: 518 Interest Rate: 4% Tax Rate: 25% As economic conditions improve, debt financing becomes more and more attractive for Lenovo. It would require increasing shares outstanding by 16% if financing by equity under any economic climate. M. Epilogue In January 2013, Lenovo opened its first USA-based PC production facility in Whitsett, North Carolina. The 240,000 square feet facility is 10 miles outside of Greensboro and produces many of the new Think-branded PCs such as the tiny ThinkCentre M92p desktop, ThinkPad Tablet 2, and ThinkPad Helix convertible Ultrabook. To celebrate opening the PC manufacturing line, Lenovo donated 36 ThinkCentre Desktops made in Whitsett to the Greensboro YMCA to be used for youth development and education programs. The big problem for Lenovo, however, is that the research firm EDC in mid-2013 predicted that worldwide shipments of PCs will decline 7.8 percent in 2013 and an additional 1.2 percent in 2014 because smartphones and tablets are all the “computer” that most people need. Global shipments of laptops and desktops fell 14 percent in Q1 of 2013. But Lenovo’s global market share in the PC industry grew to 15.3 percent in mid-2013 while market leader HP saw its market share drop from 17.7 percent to 15.7. Some analysts such as Gartner Inc. say that Lenovo has 15.7 percent to HP’s 15.5 percent making Lenovo the world’s largest PC maker. Although Lenovo is arguably the world’s largest seller of PC’s, the PC industry is in decline, so CEO Yang Yuanqing in mid-2013 told the world that for Lenovo “smartphones are our new opportunity.” However, breaking into the Apple –Samsung duopoly in smartphones is to be a difficult task. Lenovo recently opened a new $800 million R&D facility to develop smartphones and tablets in the central Chinese city of Wuhan. CEO Yuanqing calls the new Lenovo strategy “protect and attack.” Lenovo predicts that its worldwide sales of smartphones will increase from 30 million units in fiscal 2013 that ended 3-31-13 to 50 million in fiscal 2014 to end on 3-31-14. Lenovo’s primary marketing spokesperson for the company’s new K900 smartphone is NBA superstar Kobe Bryant. But in the USA, Lenovo faces an uphill battle, since in 2012 alone, Apple and Samsung spend $333 million and $401 million respectively on advertising their smartphones in the USA. Lenovo’s CEO Yuanqing recently said that “servers and storage is the business we want to expand and develop.” Rumors are that the CEO is engaged in talks with IBM to purchase some of their server business. Netgear, Inc. – 2013 Forest R. David I. Case Abstract Headquartered in San Jose, California, Netgear designs and produces Internet networking equipment, such as adapters, hubs, routers, Ethernet switches, wireless controllers, media servers, and interfaces. Netgear sells products through distributors such as Ingram Micro and Tech Data, retailers such as Best Buy and RadioShack, as well as through 45,000 retail locations around the globe and 40,000 value-added resellers. With offices in over 25 countries and about 900 employees, Netgear generates about half of its revenue from outside the USA. Netgear released some great new products in late 2013 and needs a clear strategic plan for how to best roll these products out globally. J. Vision Statement (proposed) To be the world leader in providing affordable wireless technologies and data storage space. K. Mission Statement (close to actual) Our mission is to be the innovative leader in connecting the world to the Internet (2) at a fair price to consumers. We specialize in providing user friendly products at a fair price (7) to individuals and small businesses (1) in over 25 nations globally (3). Our R&D department houses some of the most trained engineers in the world (9) working feverishly to stay ahead of the curve on changes in wireless and computer technology (4) to better provide our customers the products they need and to provide our shareholders the returns they deserve (5). Our philosophy is to maintain the highest levels of integrity as we avoid cutting corners anywhere in our business(6). 29. Customers 30. Products or services 31. Markets 32. Technology 33. Concern for survival, growth, and profitability 34. Philosophy 35. Self-concept 36. Concern for public image 37. Concern for employees 38. L. External Audit Opportunities 1. Increasing use of mobile devices by each family member in the home all needing Internet support. 2. Cable companies often purchase modems for customers and may start to purchase routers as well. 3. External drives to store data on are increasingly being purchased by consumers. 4. Both businesses and individuals alike are trusting saving their data on large serves at distant locations. 5. Increasing need for firewall and other protection devices and software to protect sensitive information. 6. Trend toward wireless technologies including 4G LTE services and even speeds beyond these. 7. Location in San Jose, California allows for easier access to graduating students from Stanford University as well as easier access to experienced talent in the Silicone Valley. 8. Smartphone shipments rose 36% in the fourth quarter of 2012. 9. In August 2013, a research study revealed smartphone shipments to India alone grew 100% year over end. Threats 1. Consumers widely believe Netgear’s products are commodities (like gasoline). 2. A competitor could enter an agreement with Netgear’s suppliers for exclusive production rights. 3. Cisco, Western Digital, and Roku all make virtually the same products as Netgear and reported 2012 revenues more than ten times Netgear respectively. 4. Corega, T-Link and D-Link, located in Japan, China, and Taiwan respectively supply heavy competition in the Asian market, and D-Link is even popular in the USA market. 5. Highly concentrated industry where the large players such as Cisco are able to shape the direction and set prices or products. 6. Large internal storage drives are needed less and less by consumers in their homes as phones and tables replace the PC. 7. Wireless technologies from the phone company are reducing the need for customers to have routers and equipment in their homes. 8. The industry requires large investments in R&D with no assurance technology will not change again before firms can recoup the initial R&D expense. 9. Clear risk of a hostile takeover from Cisco, also located in San Jose, California. 10. Most firms in the industry spend between 5% and 15% on R&D annually. 11. Competitive Profile Matrix Netgear compares favorably with D-Link but is a much smaller company than Cisco. Inline with Netgear’s mission, the firm is able to provide more attractive prices on average than competing firms as indicated by a ranking of 4 in the CPM. Areas for improvement for Netgear would be increasing the R&D budget which is currently around 4% of revenue while the industry average is 5 to 15% of revenue. EFE Matrix With an EFE score of 2.44, Netgear’s performance is average in managing external issues. Areas for improvement would including expanding wireless technologies through alliances with phone companies similar to the new G4 LTE service Netgear is providing in England to smart phone users. E. Internal Audit Strengths 1. Netgear develops and markets Ethernet switches, wireless controllers, storage devices, routers, media services, and other products associated with connecting users with the Internet. 2. Netgear develops and markets high performance devices that are dependable and easy to operate in homes and pleasing on the eye. 3. For businesses, Netgear provides networking, storage and security devices that are cheaper and easier to use than comparable products offered by rival firms. 4. Netgear has operations in 25 nations. 5. In Fall of 2013, Netgear’s 4G LTE hotspot was offered in the United Kingdom allowing small businesses to create their own local hotspots. 6. Netgear’s products can be purchased in Walmart, Best Buy, and many other large retail stores. 7. Total revenues exceeded $1 billion in 2011, and were $1.3 billion in 2012. 8. Sales in the Americas market increased 16% to $679 million in 2012. 9. Netgear recently introduced the Netgear ProSecure® UTM25S Unified Threat Management Firewall which provides two modular slots that fit optional interface cards, enabling IT administrators to custom-tailor the firewall to their specific connectivity requirements. 10. CentriaTM, a powerful, all-in-one automatic backup/media server and high-speed WiFi router backs up data automatically for users. Weaknesses 1. All Netgear products are produced through third-party manufacturers in China or Vietnam. 2. Netgear only spent $48 million, or 4% of revenue on R&D in 2012. 3. Netgear component parts such as connector jacks, plastic casings, and physical layer transceivers are all purchased from a few sources. 4. Netgear does not have long-term contracts with any of its third-party manufacturers, some of whom produce products for our competitors. 5. Europe, Middle East, and Africa sales declined 4% in 2012 to $457 million. 6. Asia Pacific sales accounted for only 11% of worldwide revenues in 2012. 7. Netgear is still dependent on hard drive and older technology associated with the PC era. 8. Inventory turnover was only 5.3 compared to Cisco’s 12 in 2012. 9. Most all sales in the America’s Region are derived from the USA and Canada. Financial Ratio Analysis Profit Margin Percent Netgear Industry Gross Margin 29.78 43.94 Pre-Tax Margin 8.39 8.18 Net Profit Margin 5.42 5.97 Liquidity Ratios Debt/Equity Ratio No Long Term Debt 0.34 Current Ratio 2.65 2.3 Quick Ratio 1.84 1.92 Profitability Ratios Return On Equity 9.25 7.71 Return On Assets 6.54 3.99 Return On Capital 9.25 6.02 Efficiency Ratios Income/Employee 81,409.41 23,586.87 Revenue/Employee 1.5 Mil 406,701.77 Receivable Turnover 4.56 4.83 Inventory Turnover 5.3 6.68 Asset Turnover 1.21 0.67 Netgear is doing very well financially, considering the size of the firm. One noticeable area of improvement is the lack of long term debt. With rates as low as they are currently, Netgear could possibly use debt to its advantage. Net Worth Analysis (in millions) Netgear is doing well financially, but is considerably smaller than Cisco, its local San Jose, California based rival. IFE Matrix Netgear’s performance is above average in addressing internal issues. One profound weakness the firm needs to address more efficiently is the declining sales in Europe, Middle East, and Africa as well as Asia Pacific sales only accounting for 11% of worldwide revenues. F. SWOT SO Strategies 1. Start producing an entry-level router designed for up to 10 devices for use in homes (S1, S2, O1). 2. Align with Time Warner to provide routers for all Time Warner customers (S1, S2, S3, O2). 3. Extend to Paris a service similar to the one offered the United Kingdom that allows small businesses to create their own local hotspots (S5, O6). 4. Spend $40 million on R&D to produce more secure firewall products (S9, O5). WO Strategies 1. Spend $40 million on R&D to produce more secure firewall products (W2, O5). 2. Form a joint venture with Andhra Pradesh in India to supply LTE services to customers (W6, O6, O8, O9). 3. Spend $2 million to recruit new talent from the Silicon Valley area (W7, O7). 4. Build a new plant in Mexico City to produce products for the Latin American and USA markets (W1, W9, O1, O5, O8). ST Strategies 1. Spend $10 million advertising, promoting products as the best value for consumers and small businesses alike (S1, S2, T1). 2. Increase over all R&D spending to $100 million per year (S7, T8, T10). 3. Restructure to division by product to be able to add new businesses more easily as technology changes (S1, S7, T6, T7). WT Strategies 1. Increase over all R&D spending to $100 million per year (W2, T8, T10). 2. Form a relationship with an additional supplier to better ensure a source for obtaining component parts (W3, W4, T2). G. SPACE Matrix Netgear is positioned close to the origin of the SPACE Matrix yet finds itself barely in the Defensive Quadrant. This position is reasonable, considering how much larger Cisco and Western Digital are as well as how most products are viewed as commodities among customers. H. Grand Strategy Matrix Netgear lies in Quadrant II of the Grand Strategy Matrix. Overall the industry is experiencing rapid growth, and this is expected to continue with markets such as China, India, and Latin America becoming increasingly connected wirelessly. However, due to Netgear’s size, the company is vulnerable to Cisco and Western Digital in any over lapping markets served. I. The Internal-External (IE) Matrix Segment Total Sales (in millions) Americas 679,419 Europe, Middle East, Africa 457,724 Asia Pacific 134,778 Total 1,271,921 The American segment is the largest producer of total revenues. Netgear should try to expand its presence in Asia, especially since all products are constructed there. J. QSPM Building a plant in Mexico is the better of the two alternatives for Netgear. After increasing market share, it would be important for Netgear to increase its R&D expenditures. K. Recommendations 1. Start producing an entry-level router designed for up to 10 devices, for use in homes for $10 million. 2. Align with Time Warner to provide routers for all Time Warner customers. 3. Form a joint venture with Andhra Pradesh in India to supply LTE services to customers. 4. Spend $2 million to recruit the Silicon Valley area for new talent. 5. Build a new plant in Mexico City to produce products for the Latin American and USA markets for $200 million. 6. Spend $10 million advertising promoting products as the best value for consumers and small businesses alike. 7. Increase over all R&D spending to $100 million per year. 8. Restructure to division by product to be able to add new businesses more easily as technology changes. L. EPS/EBIT Analysis (in millions expect for EPS and Share Price) Amount Needed: $322 Stock Price: $30.71 Shares Outstanding: 39 Interest Rate: 3% Tax Rate: 32% Debt financing is the best option for Netgear under all foreseeable economic conditions. Considering the firm has relatively few shares outstanding and no long term debt, financing by 100% debt is the most attractive choice. M. Epilogue Netgear was struggling in early 2013 with significant trouble transitioning to its new line of ReadyNAS network storage products. For Q1 of 2013 that ended 3-31-13, Netgear’s revenues were $293.4 million, down from $325.6 million in the comparable prior year quarter, a decrease of 9.9%. The company’s net income for Q1 was $19.4 million, down from $28.1 million the prior year, a decrease of 31.0%. The company’s gross margin was 30.5%, down from 31.0% in the year ago comparable quarter, and 30.0% in the fourth quarter of 2012. Operating margin was 10.0% in Q1 2013, as compared to 12.5% in the first quarter of 2012. Perhaps it is good for Netgear, making small mistakes now as a $1 billion company, rather than later when it hopes to rival other networking behemoths including the $112 billion Cisco Systems. Perhaps analysts also see it this way since shares of Netgear had risen nearly 9% by July 2013, after setting that 52-week low on April 19. The bad news for Netgear is that rival Cisco is deeply entrenched in nearly every market that matters across the globe, whereas Netgear, for example, is only just getting started on expanding its presence in China through its recent partnership with Lenovo. Netgear does expect substantial growth in India and Russia, thanks largely to newly introduced products in the region created specifically to target the expanding middle-class consumers in both markets. In April 2013, Netgear closed its acquisition of the AirCard division of Sierra Wireless, and it's "currently engaged in a very methodical integration of the AirCard business into the Service Provider Business Unit and the larger Netgear family." In October 2013, Netgear released its newest dual-band 802.11ac wireless router - the Nighthawk AC1900 Smart WiFi Router (R7000). The world’s fastest Gigabit WiFi speed, Nighthawk combines a powerful 1GHz dual core processor with a SuperSpeed USB 3.0 port and NETGEAR Beamforming+ to boost speed, reliability, and range for unmatched connectivity in the home. Nighthawk’s blazing-fast combined WiFi connection speeds up to AC1900 WiFi (600 +1300 Mbps*) make it ideal for bandwidth-hungry activities such as online gaming and video streaming. The new product is also great for supporting the increasing number of mobile WiFi devices in the home. High-power WiFi amplifiers and three external antennas provide outstanding coverage around the home, inside and out — even in the garage and backyard. Instructor Manual Case for Strategic Management: Concepts and Cases Fred R. David, Forest R. David 9781292016894
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