Understanding Apple – SWOT Analysis

Malcolm is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Understanding Apple – SWOT Analysis  

Apple (NASDAQ: AAPL) now has the largest market cap of any company. It zoomed past Exxon Mobil (NYSE: XOM) and never looked back. It is one of the most popular and recognized brands worldwide, although it seems to draw as much hatred from some as love from others.

So let’s take a look at the iconic brand here a bit removed from the daily headlines.

I. - Strengths

1- User Interface

Without a doubt, Apple engineers have an extraordinary knack for envisioning simple, intuitive user interfaces. The Mac computer was leader in this for personal computers. (Yes - I know they bought the base design from Xerox PARC. Still, they did lots of work to refine it and bring it to commercial market.) The iPod revolution was based not only on the physical design, but equally on the ease of use of its click-wheel interface.

The iPhone and iPad then revolutionize the smartphone and tablet categories. All previous smartphones were pushed into a feature-phone category, and all previous tablet computers were totally shamed as iOS was so far in advance.

The Apple User Interface now extends into the Cloud. Apple has integrated their iCloud service in such a seamless manner, that it is almost transparent to the user. The user takes a photo on the iPhone, it is immediately uploaded to the Photo Stream in iCloud, and shows up on the user’s computer or iPad. It will also show up on other users who are specified in a shared folder.

2 – Hardware Design

Apple continues to innovate in the area of hardware design. Some innovations are:

  • their own A-series chips for iDevices: Where others use general purpose ARM based integrated circuit chips to drive their devices, each A-series chip is designed specifically for the devices it is to power, designed explicitly to meet Apple’s specific requirements;
  • the unibody design for the laptops: provides a lighter, stronger case for the MacBooks;
  • the multi-touch track pad on the laptops: was new & innovative;
  • the magnetic charger connection on the MacBooks;
  • all the iDevices: the build quality is surpassed by no other;
  • The newest iPhone 5 is regarded as a gold standard in terms of its durability as well as the iOS.

In each of these examples, hardware design – aesthetics aside – is always of high quality, and uses the latest technology that is ready.

3 – Aesthetic Design

Apple has always been highly regarded for the aesthetics of its design. This has led many detractors to claim that the Macs were no more than pretty toys and those who bought them did so only for their looks. Users, however, particularly artist, always appreciated the fact that the designers of the operating system cared so much about aesthetics that they wanted the externals to reflect the high design ideals of the internal system.

Thus, the innovative lines of the iMac mirrored the minimalistic design philosophy of the Mac operating system.

This ideal of minimalism and clean simple lines has been copied by other manufacturers in computers and elsewhere.

4 – Supply Chain Management

If Steve Jobs was known as a genius of design, then Tim Cook is (so has been said) a genius of supply chain management. The efficient coordination of the suppliers of components and manufacturing is second to none. Additionally, Apple negotiates extremely favorable terms on components due to both the size of its orders, and its ability to pay in advance from cash when it is appropriate. At times it has helped to build production capacity in order to meet its demand, which is particularly important with brand new technologies. All this helps provides the Apple investor with superior returns.

5 – Holistic Approach

The strength of Apple products lies not only in their aesthetics, or in their build quality, but in the fact that Apple is the only computer manufacturer that builds both the hardware and the software. This allows for a level of integration that otherwise is not available. It also allows for greatly simplified quality assurance testing. In the end, Apple has been able to deliver an overall much more solid, robust experience to the end users. This is prized by users who do not want to spend time fixing their computer.

I used to say that the problem with Apple was that they did not have an open system, and that the problem with Microsoft (NASDAQ: MSFT) is that they did.

In smartphones & tablets, Research in Motion (NASDAQ: RIMM) is following this path with Blackberry 10.

6 – One less understood characteristic of Apple is the ability to wait.

I think this is a lesson learned from the Newton project – one of the original PDAs with handwriting input, it failed in part because it was too far ahead of its time, That is, it was a great idea (as Palm was to prove), but the hardware technology of the time was not up to the task. Apple can work on an idea for years, but wait for the moment in time when it can introduce a new product with sufficient power and style to carry off the new functionality in a form meets their standards.

Thus, the iPhone waited for the development of LTE chips that met Apples specifications, particularly in terms of power consumption. They would wait and be half a year behind the competition rather than be forced to choose between increasing the weight with a larger battery, or decreasing the battery life.

Also, the original iPhone waited to have many standard features – cut and paste a notable example – although for different reasons. Here, Apple wanted to be sure that they put out a phone that worked. To do so, they simplified the software complexity, focusing in on key, differentiating features, with other ones to be added later in software upgrades.

7 – Finally, Apple thinks long term and strategically.

One great example is Safari, their web browser. They had IE, they had Firefox, why did they need to go out and put the effort into developing their own browser? Simple. They did not want their user’s experience to be dictated by an external, competing party. This is precisely how Microsoft marginalized Apple in the 90s and on, by making the Mac version of IE incompatible (late at best) with their Jscript language. Since almost everybody wrote for IE on Windows, the somewhat incompatible IE on Mac was marginalized. (See: Apple vs. Google Maps - Deep Analysis)

So Apple, knowing that it would want to do web applications such as their mail reader on .Mac (latter Mobile Me and now iCloud), created a browser that would implement the recognized standards and made it available on Windows as well. Additionally, they made the core driver, WebKit, freely available via open source standards. (It is now used by many third party browsers.)

Again, in the development of OSX 10.6, Snow Leopard, Apple put aside (for the most part) the development of new features and instead focused on updating and minimizing the size of the code. This produced a smaller, more efficient, and more robust OS. It also produced a tighter code base for use in iOS.

This kind of forward looking strategic thinking helps to set Apple apart.

II. Weaknesses

1 – Limited Editions

One major weakness of Apple is that they are the only company that can make products with their operating systems (OSX and iOS). Add to this the fact that they offer a simplified product line, and you get a very limited set of products in comparison to those using other systems.

Examples:

  • While the iPhone 5 sports an excellent camera, if the camera is the most important feature to you, then you may find the Lumia 920 a better choice.
  • The iPhone 5 is a marvel of lightness and simplicity, but if you really want a larger screen, then you will need to go to another product.
  • If you want a 17” screen on a laptop, the only Mac you can buy is a MacBook Pro – a top of the line model. There is no option for that screen size with lower CPU specs and a lower price point.
  • In desktop models, there are even fewer options to choose from than in laptops.

2 – Limited Attitude

Magnifying this is the fact that they seem to have a “One size fits all” PLUS a “We know how best to do it” attitude. This affects choice of product styles – as noted above – but also options users have internally to the OS.

For example, Microsoft Word allows you to create popup menus and toolbars with icons for virtually any functionality you can find in the system. OSX programs allow you to customize the toolbar with a fixed and very limited set of functions – really rather pathetic in comparison. This really affects productivity, is a simple thing to implement, yet Apple has no interest in doing so.

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Detractors have seized on these factors and played them up in a manner that I think is overblown (especially number 2). Yet still these two items place limits on the appeal of products to users, and eventually affect their overall sales reach.

That said, however, we should keep in mind that this is in an environment in which Apple is literally selling products as fast as it can make them. So the bottom line is little affected.

III. Opportunities

There are a lot of opportunities for Apple to grow.

1 – iPhone

The smartphone market is still growing, so I foresee continued growth there. Additionally, as I pointed out in a previous article, the smartphone is a product that is replaced on a regular cycle, ensuring continued sales.

Forbes reporter Eric Savitz wrote Monday:

  • Abhey Lamba, Mizuho Securities… writes. “We continue to believe that Apple will deliver over 50 million iPhones during the quarter with consensus being in the high 40s.” [emphasis added]

Detractors like to snicker at the greater market share of Google’s (NASDAQ: GOOG) Android OS, but Apple still retains the greater market share of revenue in the industry – and in the end, that is what matters to investors.

2 – iPad

Again, growth here is tremendous. The iPad will most likely continue its dominance for some years to come. Eventually, it will need to share the market with competitors, but in such a rapidly expanding market, this will not stop growth for some time to come. Notably, the iPad is extremely strong in the enterprise.

3 – Mac Computers

With iPhone and iPads leading the way in the enterprise, and the popularity of the brand in developing nations, Macs continue to expand sales. Currently the expansion rate has slowed a bit, but this is in comparison to the competition which is seeing a slowdown - i.e. negative growth -in the U.S. and European markets. In short, the Mac is gaining market share – slowly, but steadily.

4 – Other areas

There is a lot of speculation that Apple will release a new iTV set. I would not want to speculate on this, since it is unannounced and unproven.

As for other products. Apple it seems is expected to revolutionize something every two or three years. This is an unreasonable expectation. For the time being at least, they will be relying on evolution of existing products. This will continue to provide both growth and extraordinary profits to the investor.

IV. Threats

Of course there are the macro-economic threats which are the same for all companies: Euro debt crises, possibility of war in the Mideast, possible financial breakdown in the U.S. These aside, I think there is one real threat to Apple’s continued success.

Most people like to point to increasing competition in the smartphone and tablet industries. But Apple has always dealt well with competition, forging it own, high margin – high profit course though the field. In smartphones, while it shares the market with many others, it still maintains the lion’s share of profits. So I do not see this as a serious threat to Apple’s well being. I do not think any other company is going to come up with a product that is so revolutionary that the iPhone or iPad will be put to shame.

To me, the biggest threat to Apple’s continued success comes from within. It is its own hubris. Apple will continue to design stunning new products, but when it thinks it can do no wrong, and it fails to listen to its customers, then it is headed for failure.

When you are a genius, you can be arrogant and follow nothing but your own insight. Steve Jobs was a genius and could do this, but when you are a mere mortal, even a talented one, then this attitude will lead to disaster.

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Malcolm Manness has a Masters degree in Computer Science, and worked for 14 years in development, technical publications and software quality assurance. He has been investing for 20 years. Currently, he does writing, and FileMaker Pro programming on contract.

His short fiction can be found (under pseudonym J. Seunnasepp) at http://50centflash.com/.

 

==== Understanding Apple series

You may love Apple and their products, or hate them to the core, but you cannot deny that Apple now has the highest market cap of any company, their products are trend setters, and currently they are trading at rather low multiples, especially regarding forward earnings.

Warren Buffet has the maxim: “Invest in what you know!” So, for those who want a unique perspective on Apple’s success, I have a series of articles Understanding Apple. I hope you will find them helpful and provocative.

Let me know what you think.

Previous Article: Three Signs Apple is Turning - A Rebuttal.

 


JaanS owns shares of Apple. The Motley Fool owns shares of Apple, Google, and ExxonMobil. Motley Fool newsletter services recommend Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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