lessons from apple for african entrepreneurs

7/30/2019 Lessons from Apple for African entrepreneurs

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In 1982 Apples revenue was below that of Microsoft indicating a loss of market leadership in

the laptop and personal computer industry. However as at 2012 following a sharp rise in revenue

in 2010, Apples revenue is about 200% that of Microsoft as shown below. A major reason for

this is Apples focus on innovation giving it leadership in an emerging tablet market via its Ipadproduct while Microsoft remains focused on providing software for personal computers in a PC

market that is set to decline as consumers adopt tablets extensively. In essence it identified

opportunity in the tablet market and had early mover advantage premised on a strategy of

innovation and uniqueness.

Source: googlefinance.com, yahoofinance.com

Apples mission statement a clear reflection of its strategy is to design the best personal

computers in the world, along with professional software. It is focused on leadership in the

digital music revolution. Apple emphasizes reinvention and defining the future of mobile media

and computing devices.

Its operations are guided by the aforementioned strategy hence its focus on quality and flexibility

in order to retain leadership in innovation.

The value of the firms strategy is reflected in the share price movement of the company as

against its competitors. This is because the market bids on the companys share price on basis of

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Comparison of Apple and Microsoft Revenue

Apple Revenue($mil)

Microsoft Revenue ($mil)


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its estimates of its future cash flows and its belief in the potential of the companys strategy and

operations to yield cash flow. Apples share price as at year end 2011 was about 300% higher

than its competitors. This is a clear indication that the companys strategy is successful in

maximizing shareholder returns as determined by positive market sentiment that is driving

demand for the stock.

The chart below reflects that the financial market is aligned with the real market performance of

the firms. This is because from Table 1 Apples revenue growth as at 2012 is more than 4000%

higher than that of its competitors hence reason why its share price is way higher by 300%.

Source:googlefinance.com, yahoofinance.com (accessed 22/04/13)

Its aforementioned mission defines its strategy. Its operations is expected to be in line with its

focus on quality and innovation and its emphasis on these is reflected in its financial

performance. From Table 1, revenue growth for Apple grew but gross profit margin increased

even more indicating that it has managed to keep rate of increase in cost of goods lower than rate

of increase in volume and prices of goods sold. Its high rate of revenue growth indicates market

leadership as represented by large number of units sold as well as higher prices indicating that

customers value its products for their innovation.

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Share Price of Apple vs. Competitors

Sony Share P

HP Share Pri

Dell share Pr

Apple Share


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Table1: Source-www.dell.com, hp.com, sony.com, googlefinance.com, www.yahoo.com, apple.com

Apple Dell HP Sony

2004 2012 2004 2012 2004 2012 2004

rowth ratios

evenue growth y/y (%) 33.38167 44.58147 0.938303 0.093675 -0.05413 0.686577 -9.5

ustainable growth rate (%) 5.437352 33.19939 42.11783 39.16115 6.721861 -60.9066 2.750929 -23

rofitability ratios

ross Profit Margin (%) 27.2859 43.87124 18.22218 22.25033 24.48533 23.24086 32.52452 32.4

et Profit Margin 3.333736 26.66509 6.382106 5.625816 4.376447 -10.5104 1.180616 -7.0

BITDA Margin 5.749487 37.38978 9.185889 8.64655 8.287341 -4.9536 10.28426 3.88terest/EBITDA ratio (%) 11.13445 1.859257 0.367744 3.689212 0.528541 14.69306 1.187104 295

quidity ratios

urrent Ratio 2.632463 1.495849 0.975863 1.338485 1.500665 1.085094 1.127812 0.82

cid Ratio 2.594776 1.475326 0.945852 1.274669 1.253323 0.949728 0.904307 0.67

ash Ratio 203.8806 75.57729 0.472834 0.673515 3.400028 2.175031 0.376879 0.34

ficiency ratios

OA (%) 3.428571 23.70331 13.69686 7.841376 4.592976 -11.6303 0.973573 -3.4

OE(%) 5.437352 35.30412 42.11783 39.16115 9.309445 -56.3826 3.721846 -22

quity multiplier (%) 158.5894 148.9417 307.5 499.4168 202.6887 484.7923 382.2873 65

sset Turnover(%) 102.8447 88.89268 214.6134 139.382 104.9476 110.6548 82.4631 48.8Working capital management

tios

ollection Period (days) 34.12369 43.59253 32.01368 57.6452 82.26832 59.61876 54.71886 54.6

ayable Period(days) 162.4917 135.4072 117.3445 103.5553 116.154 128.5017 62.78327 94.5

earing ratios

hort term debt/Total Assets Ratio 0 0 0 0.064379 0.03298 0.061112 0.137925 0.08

ong term debt/Total Assets Ratio 0 0 0.026151 0.143422 0.060719 0.200325 0.085539 0.05

ebt/Equity Ratio 0.585894 0.489417 2.075 3.994168 1.026887 3.847923 2.822873 5.5
http://www.dell.com/http://www.dell.com/http://www.dell.com/http://www.dell.com/


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Its performance is even more impressive given that revenue growth rates for Dell 0.9%while that

of Sony and HP are negative. This strong growth in revenue between 2004 and 2012 accounts for

its strong share price growth. Its gross profit margin of 44% is much higher than that of Dell

22%, Sony 32% and HP 23% indicating that it commands far higher price on its products given

their uniqueness and emphasis on quality and leadership. Its much higher gross profit margin

also indicates better cost control in the cost incurred on the product it sells.

Apple, Sony and HP are growing faster than their sustainable growth rate while Dell is growing

slower than its sustainable growth rate. However Sony and HPs growth is negative. This

negative growth indicates that Sony and HP will heavily rely on external financing since

revenues generated from operations are declining. This is indicated by the high increase in their

interest expense to EBITDA between 2004 and 2012. This indicates that they have taken up

more debt to sustain their operations and the interest expense is eating into their EBITDA

margins which have dropped significantly in the period. However Apples strong growth is

financed by cash generated from its operations hence its non-dependence on interest bearing

debt. Its EBITDA has grown by more than 600% in the period and thus its operations have been

able to sustain its high growth. Its decreased need for interest bearing debts due is indicated by

the reduction in its equity multiplier. Its growth in ROE indicates that returns from investments

in assets and operations are high.

Apple however relies heavily on non-interest bearing debt from suppliers as indicated by its

payable period (whose length has reduced) which is three times longer than its collection period.

This indicates that it rolls over funds from its suppliers three times in running its operations

before paying them. It thus saves itself from paying interest expense arising from borrowing

working capital and indicates a strong cost control culture.

On the other hand the decrease in EBITDA margin for HP and Sony makes them reliant on

interest bearing debt. Hence their interest expense has increased and has further decreased their

operating profit margins. The increase in their accounts payable reflects the tight liquidity

situation arising from poor returns from operations hence needs to use supplier financing. The

steep increase in their equity multiplier indicates that returns from investment and operations is

poor hence its increased need for external financing. This is further explained the increase in

their debt-equity ratio indicating increased of external financing. The reduction in their cash ratio

further highlights the tight working capital situation.

Dells EBITDA and net profit margin reduced despite an increase in gross profit margin . Thisreflects poor cost control. Hence it increasingly made use of short term debt as working capital

thus increasing its interest expense and short term debt. A possible explanation, asides from poor

cost control, for its tight liquidity is that its payable period reduced and collection period

increased. Hence it extended the time required to collect receivables while reducing the time it

paid payables. As a result, it worsened its liquidity state making it rely more on short term debt.


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Conclusion

Apples performance is the best in in its sector because it attempts to achieve leadership in

innovating new products. Hence it charges higher prices on its product while reducing the cost of

goods it sells. Rather than use short term debt it makes use of supplier credit reducing its

expense. It will however need to introduce more innovative products to sustain its market growthwhich has declined. Otherwise, earnings from operations will continue to reduce and this will put

the business in jeopardy by increasing its need to borrow short term debt. This will add to its

costs and reduce the value retained in the business. It can also reverse the decline in revenue

growth by cutting the prices of its product in order to boost sales volume and increase growth.

lessons from apple for african entrepreneurs

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