A Closer Look at Apple's Success Strategies - Case Study Example

A CLOSER LOOK AT APPLE’S SUCCESS STRATEGIES of the of the and number of the submitted Table of Contents Introduction 3 Company Overview 3 Sources of Risk or Uncertainty in its Operations 6 Government Regulations Affecting Apple Inc’s Operations 7 Apple’s Production Process and Challenges Faced 8 New Product Development and Impact on Finances 9 Price Trend, Reason for Price Fluctuation, Demand Elasticity and Substitutes 9 Porter’s 5 Force Analysis on Apple Inc. 12 Conclusion 14 References 15 Introduction Apple Inc. has justified the term innovation to its fullest and has made us view markets with an entirely different perspective. Considering their various products innovated over the years, the iMac had turned out to be their first stepping success with its integrated hardware into one single screen and its multi colored outer casing. It was the first computer which did not give us the boring office feel with black or grey noisy, heated monitors. For the mp3 market, iPod became a fashion accessory and its further product line extension strategies left its competitors with an unattainable challenge to cope and survive in the market (Douglas, 2012). Their product innovation made it a brand to be envied not just in terms of functionality, but features, design and quality. Therefore, in this study the researcher would be attempting to analyze that how innovation, product extension or expansion has affected the financial growth and the managerial decision making of Apple Inc. and how the company has come up with new marketing tactics to survive as a leader in its own niche (Douglas, 2012). Company Overview Apple Inc. is a, technology based multinational company, in America, having its headquarter in Cupertino, California. It is popular for its technological innovations and designs. The company is into manufacturing and selling of consumer electronic goods and is best known for its products which are a brand in itself like the iMac, iPod, iPhone, iPad and the Apple Watch. It also provides a range of online services to the consumers like the iTunes, the iCloud and the App Store (Apple Inc., 2015). Steve Jobs, Ronald Wayne and Steve Wozniak have founded Apple on 1st April, 1976 to manufacture and sell personal computers. On 3rd January, 1977 it was incorporated as Apple Computer, Inc. and was renamed on 9th January, 2007 as Apple Inc. (Apple Inc., 2015). It is globally the largest technology company by total assets, second largest Information Technology Company after Samsung Electronics by revenue and ranking third in the world as mobile phone maker. Apple Inc. has become the first company in the United States to be valued at over 700 billion dollars on 25th November, 2014 in addition to being the largest publicly traded corporation in market capitalization world-wide. As per 2014, the company had a total of 72,800 full-time employees, operating in 437 retail stores in fifteen countries and online Apple Store and iTunes Store functioning globally among which iTunes is the largest music retailer in the world (Apple Inc., 2015). Figure 1: Sales and Revenue (Source: Market watch, 2015) Apple Incs total revenue for the year 2014 was US$182.35 billion (Financial Year end October 2014) (Market watch, 2015). Referring to the diagram in figure1, it can be seen that there is a significant rise in the total revenue of the company over the past 5 years which is profitable for the company’s expansion. Figure 2: Net Income (Source: Market watch, 2015) Figure 2 shows that though there is an increase in the total revenue of the company but the net income has shown a significant fall from US$41.73 billion to US$ 37.04 billion in the year 2013 and almost a negligible rise of US$ 39.51 billion in 2014 (Market watch, 2015). This indicates that the company was not able to translate its revenues into equivalent profit due to increase in the cost of operations, raw materials (Refer to figure 3 and figure 4 below) and rise in debt obligations. Figure 3: SG&A and COGS (Source: Market watch, 2015) Sources of Risk or Uncertainty in its Operations Figure 4: Risk Analysis (Source: Market watch, 2015; The World Bank, 2015) Figure 4 above shows the total liability is Apple Inc. for the year 2010-2014 and the interest rate of the U.S for the year 2010-2013. The trend shows an increase in the liability hence, the total debt of the company rises which leads to greater interest expenses. As result, the profit margin of the company would be depleted, which in turn may affect the company’s ability to pay off future debts and increase the risk of insolvency. In addition, lesser liquid assets will also restrict the managers from making investments in research and development activities, production and operations (Thompson, et al, 2013). Government Regulations Affecting Apple Inc’s Operations The success of the corporation, Apple Inc. depends on sound and steady government policies that support a strong environment for business. The company is dependent on the rules and directives that considerably influence how the organization conducts its business operations and processes and creates worth for its shareholders. The regulatory policies include intellectual property rights, commercial taxes and the environment. Contributing in legal and government processes is a part of the company’s strategies to protect and improve the organization’s welfare. The company’s strategies are to employ in legal processes with a vision for long-term gains of the business and the shareholders (Douglas, 2012). It is the responsibility of the superior management to not only to react to the political process, but also enthusiastically encourage the company’s welfare and estimate strategy trends that can influence the future of the business. The company initiates all of its political contributions and expenses in agreement with the guidelines and the policies. The organization has a Government affair group who makes all the legal and political contributions and spending on behalf of Apple Inc. and its management, reports this information to the Board on a yearly basis (Douglas, 2012). The business involves with government officers at all levels on problems that affects the company and its operations. The company is associated with different trade organizations some of which are TechAmerica, the Business Software Alliance (BSA), the Consumer Electronics Association (CEA), and Information Technology Industry Council (ITI) which takes care of the organizational welfare and interests. The function of these associations is to uplift the common objectives and security of the member organizations and their consumers, including dealing with issues like as fighting piracy, reaching to global markets, certifying reliable product values and encouraging strong intellectual property protection (Douglas, 2012). Apple’s Production Process and Challenges Faced The production processes of Apple products are mainly based in China. The company holds a fundamental assurance that out of the country production amenities offer dimension, flexibility of price and labor, focus and skilled labors that factories based in the United States of America would not be able to match. For example, the production cost of iPhone in China is around $8 and it costs about $65 less than manufacturing it in the U.S (Blodget, 2012). Therefore, a factory unit in the United States would decrease the profit margin of the product manufactured, to a greater extent. The inbound logistics and the supply chain system of Apple Inc. is based in China, as a result, if the assembling is done in U.S, then the cost of production would increase to a large extent affecting the profit margin. This would reduce the flexibility of shifting the suppliers or logistics if it’s necessary. Factories in China are more vast and equipped than the units in the U.S, hence, employing and accommodating more skilled labors are easier and they can speed up production process by giving them live on-site facilities (Blodget, 2012). The availability of skilled labors and qualified engineers with better technicalities at a lower cost is much higher in china than in U.S. Mid-level employment is low in the U.S which the government is trying to sort out as nobody there would work for abrupt and greater working hours at lower wages (Thompson, et al, 2013). Apple Inc. was also facing assembly problem shortly for its Apple Watch devices due to its suppliers. Apple sources its different product parts from other companies like Sony, LG and Toshiba etc. Therefore, if one supplier faces problem in manufacturing, it directly affects the company Apple Inc. The company had contracted Quanta Computer for the manufacturing of Apple Watch but it was not being able to align its production line for the device which is affecting Apple. On the other hand, LG was facing a challenge in manufacturing the OLED display for the Apple Watch as they were not equipped to produce the plastic backed OLED panels which is used in the product hence delaying its launch ((Douglas, 2012). New Product Development and Impact on Finances Apple Watch is going to be launched into the new market resulting in a new strategy of diversification for Apple. It is for the first time, Apple Inc. is trying to initiate a product for the luxury market. At a quoted price of $17000, it would be the most expensive and exclusive brand among the Apple portfolio of consumer electronics and it is even more costly than MacBook and targeted to the high-end customers (Cornell University, 2013). There would be an impact in finance as majority of the buyers would opt for a lower version of the product like the Apple Watch Sport which quotes at $350 (Cornell University, 2013). Price Trend, Reason for Price Fluctuation, Demand Elasticity and Substitutes Apple uses premium pricing strategies for products like Apple Watch and exclusive products under the product portfolio of iPhone, iMac and iPad like the gold plated or customized phones or tablets as well as price skimming for the consumer product range. When there is a new launch of iPhone 5S or iPad Air, the pricing of the previous models like iPhone 5 or iPad are discounted to increase its sales, whereas, keeping a higher price on the new arrivals to attract new customers and retain customer loyalty. Consumers with lower budget opt for the low end models of tablets or smart phones, whereas, affluent consumers upgrade their product purchase due to brand loyalty (Thompson, et al, 2013). Figure 4 below shows the pricing trends of iPad over a period of 12 months and how the deals decreases with new product development. The price elasticity of demand of iPhone5S would vary depending on the geographical location. iPhone sold in the U.S where the average income of a person is higher would have an inelastic demand as compared to developing country like, Malaysia, where it would be elastic. Therefore, if the price of the iPhone is decreased in emerging countries due to its high popularity, the demand would increase (Ramirez, 2015). Substitute for Apple products are smart phones and tablets manufactured by other companies like Samsung, LG, Sony etc. For example, LG uses the same technology for manufacturing its smart phones OLED panels, as Apple, because the later sources these panels from LG itself. On the other hand, it sources its rear and front camera Sony and assembles it. Hence, the accessibility of alternative products harm Apple Inc’s capability to elevate prices, because customers may simply switch to another product or service which would decrease Apple’s brand value and have a negative impact on customer loyalty and retention (Ramirez, 2015). Figure 5: Price Trends of iPad (Source: Ramirez, 2015) Economy Influences on its Costs, Operations, and Profitability Increase in inflation rate (refer to figure 6) has increased the price at which the company sources raw materials. This contributes to an equivalent increase in the cost of goods sold and henceforth reduces the gross margin (refer to figure 3). In addition to compensate the rise in product prices, the company has to pay higher wages to the workers thereby increasing the company’s operating expenses. The rise in cost of goods sold combined with the increasing operating expenses as a result of inflation will plug a hole in the companys profit (Thompson, et al, 2013). Figure 6: Inflation Rate in the U.S (Source: Trading economics, 2015) Porter’s 5 Force Analysis on Apple Inc. The bargaining power of suppliers: Apple Inc. faces no such threat from its suppliers. For example, LG is a supplier to Apple for OLED panels; therefore, the prior company is as dependant on the later company and vice versa. Also, Apple Inc. has its manufacturing units based in the Asian countries like China, as a result, the cost of operation, labor cost is quite low as compared to developed countries, hence, Apple enjoys a cost effective supply chain (Vaccaro & Cohn, 2004). The bargaining power of buyers: Apple Inc. enjoys a high rate of customer loyalty and a large customer base. Vulnerability of customer is low for the company; hence, it faces less risk of existing customer loss due to its brand value. Still there exist some risks of customer dissatisfaction in developing countries, due to its luxury pricing which becomes unaffordable for the consumers due to low average income (Vaccaro & Cohn, 2004). Threat of new entrants: There is always a threat of new product and new market development, but matching up that to the level of Apple’s technology, innovation and take over its position is quite hard for a new comer (Vaccaro & Cohn, 2004). The threat of substitutes: substitutes does not only mean rival companies with new product innovation but also, coming up with products which can completely replace an existing phone or tablet is the real challenge and till date there is no substitute of Apple’s technology or product (Vaccaro & Cohn, 2004). Industry rivalry: Influential corporations like Samsung is coming up with new products and has a lot to contribute to the market. Android, as a free operating system platform could be a significant competitor (Vaccaro & Cohn, 2004). Figure 7: Sales from 2006-2014 (in million units) (Source: Statista, 2015) Production and pricing decision are made based on the market demand of the product. Apple Inc. introduces premium pricing and price skimming techniques to increase its brand equity and value, on the other hand, production is based on the number of goods sold every year. Figure 7 shows that there is an increase in the sales of the products, hence, demand is at a rise leading to higher manufacturing and lowering cost of production (Statista, 2015). Non-pricing strategies like cleverly laid out adverting plans, trainings and public interactions are some of the Apple’s tools of communication for its product. For example, consumer interaction in public forums with the CEO, Steve Jobs, during new product launches increases customer loyalty and brand value for the company (Constantinides & Fountain, 2008). Conclusion Apple should focus on decreasing its total liability, debts (refer to figure 4) and increasing its net income, profit yield (refer to figure 2) to averse solvency due to lack of liquid money. It should also come up with new pricing strategies for developing countries to increase sales and customer acquisition in order to gain a larger market share in countries like India or Malaysia where the android market and the Asian electronic companies are the biggest competitors, affecting Apple Incs market growth. References Apple Inc. (2015). Apple Info. Retrieved from https://www.apple.com/about/ Blodget, H. (2012). This Article Explains Why Apple Makes iPhones In China And Why The US Is Screwed. Retrieved from http://www.businessinsider.com/you-simply-must-read-this-article-that-explains-why-apple-makes-iphones-in-china-and-why-the-us-is-screwed-2012-1?IR=T Alavi, M. & Leidner, D. E. (2001). Review: Knowledge management and knowledge management systems: Conceptual foundations and research issues. MIS quarterly, 107-136. Retrieved from http://www.jstor.org/discover/10.2307/3250961?uid=3738256&uid=2&uid=4&sid=21106784507513 Cornell University. (2013). Ansoff’s Growth Strategy Matrix. Retrieved from http://www.ecornell.com/wp-content/uploads/2013/07/Ansoffs-Growth-Strategy-Matrix1.pdf Douglas, E. J. (1st ed.). (2012). In Managerial Economics. San Diego, CA, USA: Bridgepoint Education. Market Watch. (2015). Annual Financials for Apple Inc. Retrieved from http://www.Market watch.com/investing/stock/aapl/financials Ramirez, L. (2015). Apple Products Are Dropping in Price Faster, and with Steeper Discounts. Retrieved from http://dealnews.com/features/Apple-Products-Are-Dropping-in-Price-Faster-and-with-Steeper-Discounts/1009170.html Statista. (2015). iPhone, iPad and iPod sales from 1st quarter 2006 to 4th quarter 2014 (in million units.). Retrieved from http://www.statista.com/statistics/253725/iphone-ipad-and-ipod-sales-comparison/ The World Bank. (2015). Real interest rate (%). Retrieved from http://data.worldbank.org/indicator/FR.INR.RINR Thompson, A., Peteraf, M., Gamble, J., Strickland III, A. J. & Jain, A. K. (2013). Crafting & Executing Strategy 19/e: The Quest for Competitive Advantage: Concepts and Cases. Boston, MA: McGraw-Hill Education. Trading economics. (2015). United States Inflation Rate. Retrieved from http://www.tradingeconomics.com/united-states/inflation-cpi Vaccaro, V. L. & Cohn, D. Y. (2004). The evolution of business models and marketing strategies in the music industry. International Journal on Media Management, 6(1-2), 46-58. Retrieved from http://www.tandfonline.com/doi/abs/10.1080/14241277.2004.9669381#.VVCfT_mqpBc Read More