Ashford University Managerial Economics

Apple

Ashford University

Managerial Economics

BUS 640

February 15, 2013

Apple

This paper will discuss the history of apple operations, risk or uncertainty in its operations and financial reports to indicate risky and uncertain activities, government regulations that affect Apple’s operations, the inputs used by the company’s production function and challenges to securing these inputs, the new products that apple has introduced into the markets, the increase or decrease of its product prices over time and why they fluctuate, an analysis of the company’s profitability, the competitive environment in which it operates, Apple’s non-price competitive strategies, and any mistakes in its decisions over time. Apple is one of those companies that you love their products or you hate them. Some of this is due to their leadership and business attitude in the past.

Although Apple,right now, is a very successful company who is at the top of their market, it is imperative that Applecontinues to make good decisions. The death of Steve Jobs and consequentially having new senior managers now making the decisions for the company means they are being watched closely and this could cause major fluctuations in the company.

HISTORY OF APPLE

The company was started in 1976, and integrated as Apple Computer, Inc. on January 3, 1977. The expression "Computer" was detached from its given name on January 9, 2007, showing its move towards consumer electronics after the opening of the iPhone.

Apple is the world’slargest and most profitable consumer electronics corporation after Samsung Electronics, and the world's third largest mobile phone manufacturer after Samsungand Nokia. FortuneMagazine listed Apple as one of the most widely recognized and approved corporations in the United States in 2008, and in the world from 2008 to 2012.

As most people have heard, Apple really did get started in a basement or garage. Which is perhaps the reason so many people were first intrigued by the brand and could be the reason that the computers were such a success. Until the nineties, the company produced some of the best personal computers that could be found on the market, including the Apple brand, Macintosh and Power Mac computers. However, they saw a downfall in their sales after the nineties as the competition began to increase and the company was then trying to figure out what to do differently to keep their company running. The real reason for their loss of sales was a management strategic decision not to share their proprietary hardware information with other manufacturers, so their competitors built their own hardware and software (windows) on a massive scale and everyone started using PC’s instead of apple and Apple nearly went bankrupt. The year 2001 was a banner year for the company since this was the year that they introduced the Apple iPod, which is one of those devices that can propel a company in to a new market, and create pure profit to help the company keep growing.

Apple continued to stay on top technically and improve upon their technology, they produced such things as the iMac, which really did help to propel the company forward in the eyes of many consumers. “Now, Apple is a brand that most people automatically know all over the world. They are known for their innovative technology that is usually the first of its kind on the market and something that all people love to own and make their lives a bit easier with the advancements that they gave people” ("Apple History," 2013, para. 2).

APPLE FINANCES

Gross margin for 2012, 2011 and 2010 are as follows (in millions, except gross margin percentages):

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$156,508 (2012) $108,249 (2011) $65,225 (2010)

Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $87,846 $64,431 $39,541

Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 68,662 $ 43,818 $25,684

Gross margin percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43.9% 40.5% 39.4%

The gross margin percentage in 2012 was 43.9%, compared to 40.5% in 2011. This year-over-year increase ingross margin was largely driven by lower commodity and other product costs.

According to Apple’s 10K report

The Company expects to experience decreases in its gross margin percentage in future periods, as compared tolevels achieved during 2012, and the Company anticipates gross margin of about 36% during the first quarter of2013. Expected future declines in gross margin are largely due to a higher mix of new and innovative productswith flat or reduced pricing that have higher cost structures and deliver greater value to customers and anticipatedcomponent cost and other cost increases. The gross margin was largely driven by lower commodity and other product costs, a higher mix of iPhone sales, andimproved leverage on fixed costs from higher net sales. The increase in gross margin was partially offset by theimpact of a stronger U.S. dollar. The gross margin percentage during the first half of 2012 was 45.9% comparedto 41.4% during the second half of 2012. The primary drivers of higher gross margin in the first half of 2012compared to the second half are a higher mix of iPhone sales and improved leverage on fixed costs from highernet sales The gross margin percentage in 2011 was 40.5%, compared to 39.4% in 2010. Apple’s revenue and margin for the years 1997-2009 are displayed in the following graph.

Cash, cash equivalents and marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . $121,251 $81,570 $51,011

Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,930 $ 5,369 $ 5,510

Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $791 $ 776 $ 1,051

Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $19,111 $17,018 $20,956

Annual operating cash flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $50,856 $37,529 $18,595

As of September 29, 2012, the Company had $121.3 billion in cash, cash equivalents and marketable securities,an increase of $39.7 billion or 49% from September 24, 2011. The principal components of this net increase wasthe cash generated by operating activities of $50.9 billion, which was partially offset by payments for acquisitionof property, plant and equipment of $8.3 billion, payments for acquisition of intangible assets of $1.1 billion andpayments of dividends and dividend equivalent rights of $2.5 billion.

RISKS, UNCERTANTY, AND MISTAKES

The Company’s operations and performance depend significantly on worldwide economic conditions.Uncertainty about global economic conditions poses a risk as consumers and businesses postpone spendingin response to tighter credit, unemployment, negative financial news and/or declines in income or asset values.For example, the continuing sovereign debt crisis, financial market volatility, and other factors in Europe haveresulted in reduced consumer and business confidence and spending in many countries. These worldwide andregional economic conditions could have a material adverse effect on demand for the Company’s products andservices. Demand also could differ materially from the Company’s expectations because the Company generallyraises prices on goods and services sold outside the U.S. to correspond with the effect of a strengthening of theU.S. dollar. Other factors that could influence demand include increases in fuel and other energy costs,conditions in the real estate and mortgage markets, unemployment, labor and healthcare costs, access to credit,

consumer confidence, and other macroeconomic factors affecting consumer spending behavior. These and othereconomic factors could materially adversely affect demand for the Company’s products and services.In the event of financial turmoil affecting the banking system and financial markets, additional consolidation ofthe financial services industry, or significant financial service institution failures, there could be a new orincremental tightening in the credit markets, low liquidity, and extreme volatility in fixed income, credit,currency, and equity markets. This could have a number of effects on the Company’s business, including the

insolvency or financial instability of outsourcing partners or suppliers or their inability to obtain credit to finance. Apple purchase a significant amount of materials from suppliers who also supply their competitors as the components are generic. Multiple things could happen with these suppliers and Apple would be adversely affected.

Although Apple has been and is a very renowned and successful company since the time it was started it has had to surmount many sources of risks and uncertainty. The following list is some of the mistakes apple management has made and some of the risks they have taken.

1. “Allowing Eric Schmidt to sit on board of directors and give secrets away to competitors.

2. Giving Google construct an entry access into the cell phone market.
3. Not joining with Twitter.
4. Having exclusive partnership with Face Book.
5. Beinghesitant to spend money on new acquisitions.
6. Not purchasing Motorola.
7. Not permitting simple distribution of photos and videos.
9. Waiting too long to bring iTunes up to date.
10. Allowing Samsung to become the originating pioneer head with smart phone qualities” (Jackson, 2012, p. 1)



Government Regulations That Affected Its Operations:

Laws and regulations related to mobile communications and media devices in the many jurisdictions in which the Company operates are extensive and subject to change. Such changes could include, among others, restrictions on the production, manufacture, distribution, and use of the device, locking the device to a carrier’s network, or mandating the use of the device on more than one carrier’s network. These devices are also subject to certification and regulation by governmental and standardization bodies, as well as by cellular network carriers for use on their networks. These certification processes are extensive and time consuming, and could result in additional testing requirements, product modifications, delays in product shipment dates, or preclude the Company from selling certain products.

Compliance with these laws, regulations and similar requirements may be onerous and expensive, and they may be inconsistent from jurisdiction to jurisdiction, further increasing the cost of compliance. This increases the costs of doing business, and any such costs, which may rise in the future as a result of changes in these laws andregulations or in their interpretation could individually or in the aggregate make the Company’s products and services less attractive to the Company’s customers, delay the introduction of new products in one or more regions, or cause the Company to change or limit its business practices. The Company has implemented policies and procedures designed to ensure compliance with these laws and regulations, but there can be no assurance that the Company’s employees, contractors, or agents will not violate such laws and regulations or the Company’s policies.The corporation has acknowledged that its contractors' work practices have not truly met the triple bottom line criteria, and Apple's own ecological and industry practices have not been focused on the environment.

Increase or Decline in the Prices of Its Product:

Apple’s products were very expensive when they first hit the Market as they did not have very much competition and Apples has always had the attitude of grab every dollar you can before it gets away, even if it is not good business to do so. In the 90’s Apple had lost so much market share, due to strategic mistakes, that they were nearly bankrupt and Microsoft had to loan them money so they could continue to operate. During this timeframe they drastically reduced prices on all other computers and other products and trying to price sell their equipment so that they could sustain their operations. After another change in senior management Apple slowly started to regain market share and could once again start to raise their prices. At this time Apple’s ability to innovate new products was once again established and when they brought these new products to the market they were able to price them at a premium. Apple’s prices have always fluctuated due to the abilities of the senior management or the mistakes that senior management makes in marketing and pricing. Sometimes it almost appears as if Apple’s senior management has never read a business strategy Manual or text it has no way of deciding how to price their products for sustainability without the idea of grab all you can get now!

“Price elasticity of demand measures how sensitive demand for a good or service is to a change in the price like how sensitive customers are to a change in price. While senior executives can never accurately predict the way consumers will behave, price elasticity of demand helps them understand what is likely to happen and what the effect on income might be from a change in price” (Rissel, 2011, p. 22)

While Apple can never accurately predict the way consumers will behave, price elasticity of demand (PED) would help them understand what is likely to happen and what the effect on income might be from a change in price. PED is a helpful tool for making decisions on pricing any product where there is an inversely proportional relationship between price and demand, that is to say, where when the rate goes up, members demand proportionally less of a product, and when the rate goes down, members demand proportionally more of it. This means that if Apple were to alter prices from present levels, the proportion change in amount demanded would go beyond the proportion alteration in cost.  People might not buy the items if the cost were to be modified.“The formula for price elasticity of demand is fairly simple:

PED = % change in the quantity demanded/% change in the price

Breaking this down, the percentage change is computed like this:

Percentage change in quantity = Quantity 2 –Quantity/ ((Quantity 1 + Quantity 2)/ 2)

The change in the quantity divided by the average of the two quantities. This calculation produces the percentage change in the quantity demanded.

The percentage change in quantity is then divided by the percentage change in price, which equals Price 2 - Price 1/ ((Price 1+Price 2)/2)” (Rissel, 2011, p. 23).

From studying Apple’s price fluctuations and sales their elasticity of demand only follows normal patterns about half of the time. When Apple brings a new product into the market the consumer’s elasticity of demand does not seem to have very many limits and people line up to buy the new and very expensive products.

Apple’s Substitutes:

Apple operates in an oligopolistic or monopolistic marketand forevery piece of the Apple product, there's a non-Apple substitute and some of them become well known and well liked. In several cases, they even perform better and costs less.

“Obviously if there are many substitutes of apple products, low level decision making power has been leaning towards buying an Apple product” (Gedeon, 2010, para. 5).

Profitability is the state or condition of yielding a financial profit or gain. It is often measured by a price to earnings ratio.10K reports indicate that Apple has made a lot of profit whenever it has had competent leaders. “This table shows profit ratios for 2008-2011:The profitability measures selected are: Gross profit margin, Operating expenses as percentage of revenues (Sales costs, R&D costs, COGS - all as a percentage of revenue), ROA- return on assets (includes profit margin for ROA ratio, and total assets turnover ratio), Rate of return on common shareholder's equity, EPS (basic and diluted) and PE ratio.”(Vadagave, 2012, p. 1)

To generate the content in the above table, I gathered data from theSEC website

“When it comes to providing a complete solution for the consumer, Apple has created a position for itself that makes it nearly impossible for other companies to compete head on” (Bajorin, 2009, p. 2)

Even though Apple has taken a major leadership position in the PC, CE, and even smartphone markets, the company does have some interesting competitors who are watching it closely and trying to figure out how to respond. But, this competition is not coming from the traditional PC and CE players. Instead, it's coming from the likes of Amazon, Google, and to some degree, Sony.

Apple's successful position results not only from its operating system, applications environment, and user interface, with its ability to simply manage a person's digital assets, however, but also from Apple's direct role in providing content for the user: music, movies, and applications for dedicated mobile devices such as the iPhone and iPod touch.

So if content is part of what makes Apple king, then Amazon clearly has become a worthy competitor, with its content commerce model that delivers digital music, movies, TV shows, and books to end users. Amazon's cloud-based approach has made it easy for customers to access and even manage some of that digital content around a simple UI. But Amazon has a long way to go before it can deliver a localized approach to managing and accessing this content beyond standard PCs and basic mobile devices and across a broad range of products the way Apple does today.

Of the group of competitors, Sony is in perhaps the most interesting place to challenge Apple directly. It has movies, music, e-books, and console and mobile games. If the company was able to create a Sony-driven user environment that could manage just its own content across an ecosystem of Sony products, the company could emerge as quite a serious competitor to Apple as well.

Apple’s strategic behavior has always remained very sharp. Their strategy has been to do something innovatively before their competition knows about the technology and to market it with a skimming price policy.

It has monopolistic or oligopolistic market structure depending on how their products and competitors are viewed.Price decisions are totally dependent upon the cost of making the particular product. Apple uses a markup system of pricing that enables them to adjust prices to sustain their maximum profit efforts.

This paper has discussed and analyzed the history of apple operations, risk or uncertainty in its operations and financial reports to indicate risky and uncertain activities, government regulations that affect Apple’s operations, the inputs used by the company’s production function and challenges to securing these inputs, the new products that apple has introduced into the markets, the increase or decrease of its product prices over time and why they fluctuate, an analysis of the company’s profitability, the competitive environment in which it operates, Apple’s non-price competitive strategies, and any mistakes in its decisions over time. The most important thing for Apple to do now is to change their image from the Steve Jobs arrogant attitude that focused entirely on the bottom line to a much more triple bottom line image.

References

Bajorin, T. (2009, Sept. 28, 2009). Apple’s Competitors: Is Anyone Even Close. PCMAG. Retrieved from http://www.pcmag.com/article2/0,2817,2353361,00.asp

Gideon, T. (2010, March 19, 2010). The Best Apple Products Alternatives. PCMAG. Retrieved from http://www.pcmag.com/article2/0,2817,2361541,00.asp o

If a Jackson, E. (2012). Apple’s 10 Biggest Mistakes Since Steve Jobs Returned. Forbes, 1-2. Retrieved from http://www.forbes.com/sites/ericjackson/2012/09/11/apples-10-biggest-mistakes-since-steve-jobs-returned/2/

Rissel, B. (2011). Price Elasticity of Demand. Union management, 34(10), 22-23. Retrieved from http://search.proquest.com.proxy-library.ashford.edu/docview/902758503?accountid=32521

The History of Apple Inc. (2013). Retrieved from http://www.nostoptechnology.com/