Apple Inc. commonly known as Apple has effectively managed to be a successful company in a very competitive consumer electronics industry by been innovative and differentiating the company’s products with similar products in the markets by offering high quality products and good customer service while the actual manufacturing of the products is outsourced to trusted third party suppliers. On a wider perspective, the company has set high standards that even the company itself has to be on its level best to maintain the standards that it has set. Over the last few years, the consumer electronics market has become heavily commoditized which as a result has seen intense completion from competing firms in the industry where price has become the main aspect of the competition. By making use of the talented research and development team, Apple has been able to position its products as the best in terms of innovativeness, performance, and reliability while compared to similar products in the market. This paper will examine the history of Apple Inc., Apple financials, risks or uncertainty, government regulations affecting Apple, pricing strategies, demand elasticity for Apple products, Apple’s profitability, competitive environment, and mistakes in its decisions over time and recommendations for improvement. History of Apple Inc.
In 1976, 21 year old Steve Jobs and Steve Wozniak together, in the garage of Jobs’ Cupertino, CA home, they founded a new company which they christened “Apple”. Their goal – create an inexpensive and simple to use computer. Apple was established in 1976. Apple was incorporated on January 3, 1977 as Apple Computer Inc. Apple is probably the most well-known company when it comes to manufacturing technology that is innovative. Steve jobs and Steve Wozniak were friends and both interested in electronics. Wozniak had been dabbling in computer-design for some time when, in 1976, he designed what would become the Apple I. Jobs, who had an eye for the future, insisted that he and Wozniak try to sell the machine, and on April 1, 1976 Apple computer was born. Apple was established by Steve Jobs, Steve Wozniak, and Ronald Wayne to sell the Apple I personal computer kit. Wayne sold his portion of the company to Jobs and Wozniak early in the history of the company. The company began to really take off in 1977 when the Apple II was introduced, the first personal computer to come in a plastic case and include color graphics. The Apple II was an impressive machine at its time. Apple Inc. is the largest technology company in the world and second largest company in market capitalization.
Apple designs and manufactures computer hardware, software, and other consumer electronics, including the iPod, iPhone, and iPad. Apple Inc. designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music players and sells a variety of related software, services, peripherals, networking solutions, and third party digital content and applications. Apple offers a range of mobile communication and media devices, personal computing products, and portable digital music players, as well as a variety of related software, services, peripherals, networking solutions and third-party hardware and software products. In addition, the Company offers its own software products, including iOS, Apple’s mobile operating system; OS X, the Company’s Mac operating system; and server and application software. Apple’s primary products include iPhone, iPad, Mac, iPod, iTunes, Mac App Store, iCloud, Operating System Software, Application Software and Other Application Software Apple has been innovative and set industry standards for personal computers from the beginning. Later with the introduction of PowerBooks, they began to set standards for laptop computers. Today with their computers, laptops, and other incredibly successful devices such as the iPod, iPhone, and iPad, they are a force to be reckoned with. In May 2010, Apple’s market cap closed the day at $222.12 billion putting it ahead of rival Microsoft Corp. Shares of Apple reached an all-time high of $330.26 during 2011’s first regular trading session. Financials
For the fiscal year (FY) 2013 fourth quarter (Q4) Apple posted revenue of 37.5 billion and quarterly profits of 7.52 billion. Figure 1 shows financial data for three consecutive years from 2011-2013. See Appendix Figure 1 for financial details. Net sales for FY 2013 were $170,910 million an increase of $14,402 million from FY 2012 (Apple reports, 2013). Apple sold 33.8 million iPhones, 14.1 million iPads, and 4.9 million Macs during 2013 Q4. Apples App Stores’ sales exceeded $10 billion for FY 2013. App Store customers downloaded almost three billion apps in December 2013 making it the most successful month in App Store history (App store sales, 2013). New Products, New Markets
In The Wall Street Journal, tech reporter Daisuke Wakabayashi (2014) describes how Apple is expanding its reach into the business market. “The iPhone has replaced the BlackBerry as the mobile phone of choice, as the iPad assumes tasks once reserved for PCs,” (Wakabayashi, 2014). Wakabayashi (2014) noted that “Apple is going mainstream” when it comes to the corporate world, and he profiles multiple large enterprises — including SAP, Nordstrom, and Cisco — that have rolled out iOS and other Apple devices to their employees. “More than 90 percent of all business apps were deployed on Apple’s iOS mobile-operating system in the third quarter.” (Wakabayashi, 2014). During the Steve Jobs era, outsiders speculated about each new release of a major product, trying to read the founder’s public comments. But Jobs was notoriously stingy with the press. Analysts had to spy on suppliers and the carriers that eventually would market the devices. Now the world at Apple Inc. has changed. Everyone knows what Apple Inc.’s new iPhones will look like and do. Nearly everyone knows what their eventual markets will be. Among the things that have made Apple ordinary, one of the most significant is its product releases. One of Apple’s problems has been widely identified. Other companies can and are releasing exciting products. Competition
Apple competes in three different fronts, the computer industry, handset industry and the music industry. Apple relies on its innovative design team to design and create the various operating system and hardware that differentiate the company’s products with the products offered by the competitors. The company’s apparent quality means that the company is able to charge high prices for its products while compared to equivalent products by the competitors. During the last few years, Microsoft and Google who are some of Apple’s biggest competitors have developed products that can be argued to be in response to Apple’s innovative products. Google’s Android platform was developed to directly compete with Apple’s iOS platform that runs through all the iPhones whereas Window 7 was introduced in order to give windows user a Mac OS feel. As far as the computer markets are concerned, Dell sells more computers than Apple simply because the company has adopted a low price strategy where as Apple charges premium prices for its computing products. From creating and designing computers to delivering the iProducts, Apple has come a long way. It has placed itself in the most redefining moment of our generation; Apple is at the epicenter of the technological revolution era. The company has an intangible asset that puts it in the forefront of the minds of consumers and investors alike. Apple has been synonymous with the word innovation but what is its future and, specifically, its struggles against a top tier competitor?
How well does the future of Apple (AAPL) stack up to its rival, Samsung (SSNLF.PK)? Apple’s share price is not fully justified relative to its financials. However, Samsung is better positioned for growth and has greater upside potential. Apple faces its biggest threat as Samsung has slowly gained market share. In 2012, Samsung sold 63 million units of the Samsung Galaxy. Despite this, Samsung is still nowhere near Apple’s ability to generate revenues. Apple has sold 5 million iPhone 5’s in a weekend, and will probably continue to outsell Samsung’s Galaxy phones for some time. However, it is no longer safe to say that Apple will forever remain the leader in the smartphone market. The numerous illegal file sharing sites poses great threat to Apple’s iTunes as potential customers who would have paid money to Apple in order to be able to download songs usually ends up getting the songs free of charge by downloading them form the illegal file sharing sites. The recent economic downturn has meant that consumer spending power has been drastically reduced which in turn would mean low sales figures for Apple products. It is important that Apple anticipate situations where customers prefer other products since they are lower priced. Apple’s competitors are well established and poise a threat to Apple Inc. because they produce products that directly compete with Apple products at lower prices. A majority of technological companies have the ability to produce products that are compatible with Apple products.
As far as the environment is concerned, Apple (2012) states that the company thoroughly considers the impact that the company’s products have on the environment when being used and after they have stopped being used. The company states that less material is now being used in all aspects of the products to make sure that the impact that the company has to the environment is minimized to the lowest level possible. The worldwide operation NGO Greenpeace has continually attacked Apple Inc. since 2003 for not taking measures toward a more sustainable business approach. Greenpeace criticized Apple for its continued use of toxic materials in the production process, the lack of recycling, and waste reduction programs (Kulmer, Teichman, & Timpernagel, (2012). Apple has removed all toxic materials including lead and mercury, from their production line (Environmental health, 2013). Designing greener products meant Apple had to consider the environmental impact of the materials used to make them, from glass, plastic, and metal in their products. Apple is committed to protecting the environment, health, and safety of our employees, customers, and the global communities in which we operate. Apple Inc. now has in place Environmental, Health, and Safety policies (EHS) to ensure they comply with regulations. The guidelines meet or exceed all applicable environmental, health and safety requirements. Apple evaluates their EHS performance by monitoring ongoing performance results and through periodic management reviews (Environmental health, 2013). Where laws and regulations do not provide adequate controls, Apple has adopted their own standards to protect human health and the environment. Apple advocates the adoption of prudent environmental, health and safety principles and practices by our contractors, vendors, and suppliers. Apple strives to create products that are safe in their intended use, conserve energy, and materials, and prevent pollution throughout the product life cycle including design, manufacture, use, and end-of-life management (Environmental health, 2013). Every Apple product meets and/or exceeds the U.S. Environmental Protection Agency’s strict Energy Star guidelines for efficiency. Porter’s five forces
Porter five forces analysis is a framework for industry analysis and business strategy development. It draws upon industrial organization (IO) economics to derive five forces that determine the competitive intensity and therefore attractiveness of a market. Attractiveness in this context refers to the overall industry profitability. An “unattractive” industry is one in which the combination of these five forces acts to drive down overall profitability. The five competitive forces are; threats of new entrants, bargaining power of customers, threat of substitute products, bargaining power of suppliers and competitive rivalry within an industry. By applying Porter’s five forces framework, it will help establish Apple’s position in the market. In situations where it is easier for any investor to invest in a sector, then the threat of new entrants can be considered very high. The nature of barriers in place in a particular industry will establish the degree that threats of new entrants pose to the industry. It can be argued that the threat of new entrants in the PC, tablets, and smartphone industries is very high since as noted by Kim (2012), huge amounts of capital for R&D and marketing have to be spent in order to bring a smart phone or tablet to the market. In addition, Kim (2012) notes that economies of scale have to be taken advantage of in order to gain a platform and access the distribution channels effectively. Some of the new entrants to the industry that have contributed to the decrease in the profitability in the industry include HTC, BenQ, Huawei, ZTE and Lenovo. Suppliers in any sector include suppliers of the various raw materials used in manufacturing of specific products. The power of suppliers in any given industry will be determined by the amount of suppliers in the given industry. This means that few suppliers in any industry will imply that the suppliers have more bargaining power. The threat of suppliers in the PC, tablet, and smartphone industries can be said to be very high since there exists very few suppliers of digital signaling chips and operating systems.
Texas Instruments as noted by Forbes (2010) is the major supplier of signaling chips to various computers and handset manufacturers. The existence of few suppliers implies that the suppliers can manipulate the market at any time since they have a lot of bargaining power. The large array of Pcs, smart phones and tablets has created a lot of power at the hands of the consumers. However, once the initial purchase has been made, brand loyalty may begin to formulate. The Apple store offered on many platforms is not transferable to another brand, which may be deemed as a high exit costs. Although at first analysis, it may seem that the consumer has a large array; their choices are restricted temporarily as often the products are bought whilst being contractually bound to a network provider/carrier. Arguably this leads to the perfect situation for the consumer to become acquainted with their product and ascertain brand loyalty. The consumer has a lot of bargaining power, however – it may be expensive both financially to terminate contracts and personally as they may lose their apps and software which they have built their device around. A substitute product can be described as a product that is unique while compared to another product in the market but can meet the needs usually met by the product that it is different with. Some of the substitutes to the PC, tablet, and smartphone industries include emails and fax. However, substitute threats cannot be said to be very high since they cannot be used in urgent cases unlike in voice calls. Rivalry between competing firms in a given industry can be of different types. Competing firms compete in forms of price wars, products differentiation, and product development among others. Law entry barriers in the industries means that there exists many competitors in the various sectors that Apples operates in which results to intensified competition as the companies aim to increase their market share. Risks, Uncertainty and Mistakes
Although Apple has been and is an extremely successful company, they have had to overcome several mistakes and misjudges. The following is a list of errors made by Apple as well as questionable risks that were taken: Allowing Samsung to become the leader in cellular phone sales Allowing Eric Schmidt to sit on the Board of Directors while he supplied secrets to rivals Not buying Motorola
Not updating iTunes in a timely manner
Apple Inc. is facing scrutiny from two government agencies in China for allegedly failing to follow the nation’s rules on product warranties. Apple came under fire from Chinese regulators in March of 2013 for violating consumer protection laws (Apple blasted, 2013). Apple was accused of treating customers in China differently from those in other countries. Apple may get the brunt of the attention for its use of offshore havens to offset the taxes it pays in the U.S., but Apple is hardly alone. Six of the biggest names in technology Apple, Microsoft, IBM, Cisco Systems, Hewlett-Packard and Google – ranked in the Top 15 of the 100 publicly-traded companies with the most money held offshore, according to a new report called “Offshore shell Games” by U.S. PIRG, a federation of public interest research groups (Guglielmo, 2013). Many large U.S.-based multinational corporations avoid paying U.S. taxes by using accounting tricks to make profits made in America appear to be generated in offshore tax haven countries with minimal or no taxes. By booking profits to subsidiaries registered in tax havens, multinational corporations are able to avoid an estimated $90 billion in federal income taxes each year (Guglielmo, 2013).. These subsidiaries are often shell companies with few, if any employees, and which engage in little to no real business activity (Guglielmo, 2013). Pricing Strategies
The initial price of the iPhone introduced in 2007 was set at $499 for the 4 GB model and $599 for the 8 GB model. Despite the high price, consumers across the U.S. stood in long lines to purchase the iPhone on the first day it was released. Two months after the iPhone was introduced Apple discontinued the 4gb model and lowered the price of the 8 GB model to $399. The pricing strategy used by Apple for the iPhone is skimming. Figure 2 shows the initial pricing for the iPhone 8 GB on release in several countries. See Appendix Figure 2 for detail pricing. “Price skimming means to set a very high price that allows relatively high profit outcomes for the firm. Price skimming is intended to gain as much profit for the firm as possible in each production period. As such, the skimming price must be the same as the short-run profit-maximizing price, since there is no point setting a price higher or lower than that if the intention is to gain as much profit as possible” (Douglas, 2012, ch 9.2, para. 2). The challenge for Apple is to keep coming up with proprietary products that fuel its business model, which is based on innovation and R&D for both hardware and software. Apple seems to reduce prices in order to make their products affordable and popular among other competitive products. Apple has changed prices on the iPhone and iPod according to its customers and geographical locations.
Apple’s price changes are in accordance with what consumer can afford to pay in different countries (Sliwinska, Ranasinghe, & Kardava, 2012 & Ravi, 2009). “Price elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in price. ” (Douglas,2012). While Apple can never accurately forecast how consumers will behave, price elasticity of demand (PED) would assist management in measuring the sensitivity of pricing on demand. When Apple has introduced new products to the market, the consumers elasticity of demand does not appear to have a limit. Customers have lined up hours before a new iPhone release, just to get the latest for Apple. A products PED is affected by several factors; does the product have a lot of close substitutes, is the product a luxury or a necessity, who pays for the product, and how differentiated the product is. When Apple introduced the iPhone in 2007 there were zero similar products in the market. The iPhone was a touchscreen iPod, with internet access, and a phone with texting capabilities. Since the release of the original iPhone there has been an onslaught of new devices introduced to the cellular phone market, causing the elasticity of the iPhone has changed. This can be seen in the changes in pricing of the iPhone and with the introduction of the iPhone 5c a cheaper version of the iPhone. Apple’s Profitability
Earning is the condition of producing a fiscal gain or profit, and is calculated by a price to earnings ratio. Apple’s 10K reports show that Apple has been profitable when being run by efficient leaders. Figure 3 indicates profit ratios for 2008-2011: the earnings steps used are Gross profit margin, Operating expenditures as a percentage of income, Return of assets (ROA), Rate of return on shareholder equity, Earnings per share (EPS) basic and diluted, and Per earnings ratio. See Figure 3 in the Appendix Conclusion
Apple is probably the most well-known company when it comes to the making of technology that is cutting edge and something that everyone wants to have in their possession. Apple Computer first came to be a company in 1976 when Steve Jobs and Steve Wozniak. Apple has continued to stay on top of their game and improve upon their technology; they have produced such products as the iMac, iPhone, and iPad that have help propel the company to one of the top companies in the world. Now, Apple is a brand that most people know all over the world. Apple is known for their innovative technology that is usually the first of its kind on the market. Apple Inc. has grown in the last three decades to become a leader in several markets, PC, Smartphone, and the music industry. The growth has been attributed to continued research and design of innovative products, price strategy, and good leaders.
Figure 1: Apple Three-Year Financial History
Results of Operations
Total Net Sales
Cost of Sales
Selling, General and Admin.
Total Operating Expenses
Income before provision for income taxes
Provision for income taxes
Diluted earnings per share (DES)
Shares used in computing DES
Cash dividend declared per common share
($ millions, except shares in thousands and per share amounts). Data retrieved from Apple Inc. website.
Figure 2. Retail price of the 8 GB iPhone
Figure 3. Profit Ratios
Gross Profit Margin
Sales Cost as a % of Revenue
R& D Costs as a % of Revenue
Cost of Goods Sold Costs as a % of Revenue
Operating Expense Costs as a % of Revenue
Return on Assets (ROA)
Profitability margin for ROA
Total assets turnover ratio
Apple blasted by Chinese regulators over service. China Daily 03/29/2013. Retrieved from http://www. usa.chinadaily.com.cn/2013-03/29/content.16357267.htm Apple reports fourth quarter results. (2013). Retrieved from Apple Inc. website on 12/23/2013 http://www.apple.com/pr/library/2013/10/28Apple-Reports-Fourth-Quarter-Results.html App store sales top $10 billion in 2013. (2013). Retrieved from Apple Inc. website on 1/14/2014 http://www.apple.com/pr/library/2014/01/07App-Store-Sales-Top-10-Billion-in-2013.html Douglas, E. (2012). Managerial Economics (1st ed.). San Diego, CA: Bridgepoint Education Inc. Environmental health and safety policy statement. (2013). Retrieved from Apple Inc. 1/14/2014 http://images.apple.com/environment/reports/docs/EHS_policy2013.pdf Forbes (2010). Texas Instruments Dips into The Chips Part, Earning Top Expectations. Retrieved 1/14/2014 from www.forbes.com/2010/10/25/earnings-texas-instrumnets-equities-markets-chips.html Guglielmo, C. (2013). Apple, Google Among Top U.S. Companies Parking Cash Offshore To Reduce Taxes, Study Says. Retrieved 1/14/2014 from http://www.forbes.com/sites/connieguglielmo/2013/08/01/apple-google-among-top-u-s-companies-parking-cash-offshore-to-reduce-taxes-study-says/ Kim, C. & Mauborgne, R. (2012). Porter’s Five Forces Model and Blue Ocean Strategy Kim & Mauborgne. Retrieved 1/14/2014 from http://applejeanochia.wordpress.com/2012/04/27/porters-five-forces-model-and-blue-ocean-strategy-kim-mauborgne-3/ Kulmar, S., Teichman, S. Timpernagel, T. (2012). A green supply chain is a requirement for profitability. International Journal Of Production Research, 50(5), 1278-1296. doi:10.1080/00207543.2011.571924 Ravi, L. (2009). Apple iPhone price cut: Is it a right strategy?. ICFAI Journal of International Business, 4(1), 46-58 Sliwinska, D., Ranasinghe, J. & Kardava, I. (2012). Apple’s pricing strategies. Retrieved 1/14/2014 from http://aeunike.lecture.ub.ac.id.files/2012/04/case-kel.13.pdf Wakabayashi, D. (2014, Jan. 9). Apple devices flow into corporate world. The Wall Street Journal. Retrieved from The Wall Street Journal website 1/14/14 http://online.wsj.com/news/articles/SB10001424052702304244904579278560822979176?mg=reno64- sj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052702304244904579278560822979176.html
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