Using Economic Theories to Analysis Apples Strategy - Essay Example

Economic Analysis of Apple Inc Contents Introduction 3 Rational of the Study 3 Research Aim 3 Research Objectives 4 Company Profile 4 Data Collection Process 5 Economic Theories 5 Economic Application Analysis 9 Recommendations 19 Conclusion 20 Reference List 21 Introduction The state of business affairs has become highly competitive and complex in the contemporary era. At this juncture, firms need to analyze their market position and commercial success in terms of subjective theories. Apart from the theories of strategic management and marketing, commercial proficiency of a contemporary business firm can be judged in terms of economic theories. Economics is the study of consumption and production of goods and services. It also elaborates on various means by which wealth is transferred or obtained to produce goods and services. The behavioural process of consumers, suppliers and other business stakeholders of a firm can be thoroughly assessed with the help of appropriate economic theories (Heracleous, 2013). Rational of the Study This report aims to interpret commercial success and failure of the famous multinational company of Apple Inc. For making the analysis, the researcher will use theories of economics such as, that of demand and supply, consumer behaviour, absolute advantage, rational choice and market structure (Hutt and Speh, 2013). It is highly rational to conduct this type of a research because the researcher will finally provide specific recommendations based on the analysis, that will help the company rectify few of the business problems. Research Aim The current research work aims to analyze commercial success and failure of Apple Inc. by applying economic theories. Research Objectives In order to resolve primary aim of the research work, the research objectives are framed. These objectives are: To analyze the business nature of Apple Inc. To study the concepts of certain basic economic theories To utilize secondary data and information for assessing commercial success of Apple Inc. with application of relevant economic theories. Company Profile Apple Inc. is a publicly traded company founded in 1976, situated in California. The company engages in providing computer hardware and software products. Popular products of the company comprise iMac, iPhone, iPad, iOperating system and iTunes. At present, the company headquarters is located at Cupertino, California in the United States. The company conducts operations in almost all world economies. The organization was founded by three proficient business leaders, namely Steve Jobs, Ronald Wayne and Steve Woznaik (Apple Inc., 2012). It was estimated that in 2010, the organization owned over 425 retail stores across different marketplaces. The company provides services through both online and offline selling means. In 2012, the net income of Apple Inc. was estimated as US $ 41.733 billion, but in 2013, it was astonishing to note that income of the company had declined to US $ 37.037 billion (Hutt and Speh, 2013). However, the organization experiences huge scale and scope of trade and recruits over 80000 skilled workforce around the world. Though the net income or profit is falling, yet the company appears to experience increasing revenue. The revenue of Apple Inc. in 2012 was US$ 156.508 billion, which had increased to US $ 179.91 billion in 2013 (Apple Inc., 2014a). Falling profitability of Apple Inc., despite its rising revenue, implies presence of flaws in the internal working process (Berglof, 2011). The researcher will make use of specific economic theories for analysing the actual cause of this problem. Data Collection Process The entire analysis about Apple Inc. was made after considering data and information, including several cross-sectional and time series units. Also, all data and information were collected from secondary data sources. The research process did not include any type of new or primary data set. Even so, all secondary sources comprised previous research studies and books written after the year 2000. It was highly feasible to use secondary sources as this involves less cost and time. Books, journals, company’s original website, national newspapers and authentic government websites were the different types of secondary resources used by the researcher. Finally, it should be noted that the researcher had strictly followed ethical and moral norms of research while collecting relevant data and information pertaining to the research (Hutt and Speh, 2013). Economic Theories Theory of Demand The law of demand states that quantity demanded for a commodity or a service is inversely related to its price level at a particular point of time, considering other elements affecting demand to be constant (ceteris paribus). Figure 1: Demand Curve Price Demand Curve Quantity Demanded (Source: Author’s Creation) However, apart from price, demand for a commodity or a service also depends on certain factors. Some of these factors are price of substitutes, status symbol products, income of the consumer, buyers taste and preference and public policies. Substitute products share common market demands and experience positive cross-price effect. Figure 2: Substitution Effect Price of good X Quantity demanded for good Y (Source: Author’s Creation) If two products X and Y are substitutes, then rise in price of X causes fall in quantity demanded for Y. On the contrary, quantity demanded is always positively related to income level of the consumers and intrinsic status worth of the product. Theory of Supply The law of supply states that, keeping other elements affecting supply constant (ceteris paribus), price of a commodity at a particular point of time is positively related to quantity of supply. Figure 3: Supply Curve Price Supply Curve Quantity of Supply (Source: Author’s Creation) Apart from price, supply quantity for a particular commodity depends on factors such as, state of technology, government policy, the firm’s business attitude and availability of resources. For instance, if the state of technology improves, then a firm is able to produce more with the given amount of resources. This helps to lower average costs or to improve profit margin of the firms. Theory of Absolute Advantage The theory states that a country or an organization possesses absolute advantage over manufacturing a particular product or service, if it can produce a larger quantity with the same amount of resources, than the competitors. The concept was introduced by Adam Smith in the context of international trade. The theory stated that a country or company should only decide to produce a particular product or service, if it involves lowest opportunity cost. Theory of Consumer Behaviour The theory of consumer behaviour helps organizations to analyze the nature of buyer’s utility and demand pattern. Based on this theory, a company can produce goods or services, which generate maximum utility for buyers. Figure 4: Model of Consumers Decision Making (Source: Bray, 2010) The above figure shows the basic process through which consumers create their final demand. Rational Choice Theory This theory helps in modelling economic and social behaviour. If an organization conducts business on the basis of rationality, then it tries to maximize profit subjected to minimization of cost. Even so, the theory assumes the existence of transitivity, irrelevant alternative independence and completeness. Buyers in the market portray rationality in form of indifference, strict preference or weak preference choices (Altman, 2000). Market Structure Theory The market structure explains the characteristic features of different types of market. The pricing and output decisions of firms are greatly dependent on the exact type of market wherein commercial operations are conducted. The table below presents basic features of the most common types of markets. Type of Market Number of Buyers Number of Sellers Type of Products Pricing Decision Operational Decision Cost of Advertisements Perfect Competition Infinite Infinite Homogeneous Equilibrium Price Revenue Maximization Null Monopoly Infinite One Homogeneous or Heterogeneous Price Discrimination Profit Maximization Null Monopolistic Infinite Finite Differentiated Competitive Pricing Profit Maximization High Economic Application Analysis The current market position of Apple Inc. can be explained in detail with the help of abovementioned economic theories. Theory of Demand Application Figure 5: Increasing Demand for Apple Inc. Products (Source: Statistica, 2014) The above bar graph shows that aggregate demand for the different products of Apple Inc. is increasing over time (from 2007 to 2014). The causes behind this rise in product demand of the company are given below. Since emergence globalization, the aggregate amount of employability and per person income levels of consumers has improved (Swee-Hoon and Devlin, 2011). As per the law of demand, increased income has helped to enhance demand created by the consumers for luxury electronic products of Apple Inc. Apple Inc. shares high brand value in the market and manufactures non-imitable rare electronic gadgets. Consumers consider using such products as a symbol of status. So, as an exception to the law of demand, rich buyers generate higher demand for the products of Apple Inc. due to conspicuous consumption effect. The governments in emerging countries such as, India, China, Russia and Brazil, have adopted open door policies in commerce for encouraging inward foreign direct investments within their economies. They have created Special Economic Zones and incorporated additional taxable exemptions for encouraging foreign intervention within the economies. According to the demand determinant theory, such policies of the public authorities have enabled Apple Inc. expand across numerous economies and consequently, experience increased demand for its products. Moreover, taste and preference patterns of the consumers have also helped the company enjoy higher market demand. Figure 6: Consumers Preferring Electronic Gadgets (Source: Shilov, 2011) From the above line graph, it can be stated that contemporary buyers are more inclined towards purchasing Smartphones and media tablets; other products such as, PMP and MP3 players, are also experiencing considerable market demand (Antreas, Spiros and Vlassis, 2001). As consumers’ taste and preference is an important determinant of demand, increasing revenue earned by Apple Inc. can be attributed to the buyer’s preferences. Consumer Behaviour Theory Application Apple Inc. formulates its product, price, promotion and distributional strategy according to the theory of consumer behaviour. Figure 7: Factors Considered by Apple Inc (Source: New Page Publishers, 2010) The above chart shows detailed aspects on grounds of which Apple Inc. tries to maximize the utility level of its consumers. This can be explained through a 4P analysis model. Product The company manufactures exclusively differentiated products for consumers. Company products such as, iPod, iMAC and iPhone, have garnered immense popularity in global markets (Etherington, 2013). The firm manufactures varieties of model with diversified features for each category. Recently, it has declared to introduce a new product, iWatch, for consumers who largely desire to use modern electronic gadgets (Etherington, 2013). Price The company prices its products through premium pricing strategy. Apple Inc. tries to maximize the Veblen and conspicuous effect for its products. According to the Veblen theory, the company states that their products are priced high because of their superior quality (Masudul and Mohammad, 2004). Furthermore, it considers upper middle and rich income individuals, as these they buy premium priced products of the firm in order to portray their social status (Nair, 2014). Place Figure 8: Wide Distributional Network (Source: Paczkowski, 2014) The company realizes that a large proportion of consumers prefer to make purchases through online selling sites such as, Amazon, WalMart and Target. As a result, Apple Inc. has widely distributed its products across various online and offline supermarkets. Promotion Apple Inc. generally implements the word-of-mouth promotional strategy in business. Through this strategy, the firm tries to convince buyers that products offered are of superior quality (Ted, 2011). Theory of Absolute Advantage According to the theory of absolute advantage, Apple Inc. only manufactures semi-finished products, which can be produced with minimal amount of opportunity cost. The company acquires many of its intermediate inputs from external suppliers such as, Sony Corp and AAC Technologies Holding Inc. This is because the company does not have absolute advantage over manufacturing these inputs (Apple Inc., 2014b). Theory of Supply Application Figure 9: Supply of Apple Inc. (Source: Author’s Creation) According to the law if supply, since Apple Inc. sells high priced products, it also ensures wide and increased supply of the same across all marketplaces (Donald, 2004). However, in order to enhance profit and supply in long run, the company makes large investments for research and development purposes (Nair, 2014). Figure 10: Increased R&D Investments Apple Inc. (Source: Hughes, 2013) The above graph reflects increasing R&D investments of Apple Inc. Improvements made in technology are likely to lower cost of the firm, thereby increasing profit at the given prices. Market Structure Theory Application Apple Inc. conducts its business in a monopolistically competitive market structure. Figure 11: Apple Market Position (Source: Zhang, 2013) From the above position map, it can be claimed that presently, Apple Inc. operates in a highly competitive market environment. This creates constant threat to its current profit and revenue share. Substitution Effect Application Recently, results of the Global Smartphone Sales Report have stated that market share of Samsung Electronics has increased by 32% from 2012 to 2013; but that of Apple Inc. has shown a rise of only 12% (Bradshaw, 2013). Figure 12: Position Map High Quality Apple Inc. Samsung Group Low Price High Price Low Quality (Source: Author’s Creation) In reality, numerous consumers prefer to purchase the less pricy products of companies like, Dell and Samsung, compared to the expensive electronic gadgets of Apple Inc. This is the impact of substitution effect impact on Apple Inc. Rational Choice Theory Application If Apple Inc. is a rational business firm, then it should try to maximize revenue and minimize its cost subject to the given set of resources. Figure 13: Rationality Problem of Apple Inc. (Source: Author’s Creation) The above graph has been drawn by obtaining revenue and profit data of Apple Inc. from its annual report of 2013. This shows that though the company’s revenue is increasing, yet the net profit is falling. This can be attributed to the increased R&D investments made by the firm. Even so, innovation is indispensible as this will effectively contribute towards enhancing the company’s core competencies in the competitive market (Bidgoli, 2010). As a result, the most rational option for the concern is to introduce a new pricing strategy (Ross, 1979). Recommendations As opposed to establishing premium prices, Apple Inc. should render products produced more competitive in the market by applying a new competitive pricing strategy. Lower price, as per the law of demand, would help to enhance organisational sales (BBC News Business, 2011). If the company experiences higher market demand, then it can lower cost through economies of scale in production (Orbach and Einav, 2007). The company must extend business operations in emerging economies of the world, given that income level and discretionary spending powers of the individuals therein are rapidly increasing (Baker, 2010). Conclusion Business economics is a very popular subject of study in the contemporary era. It states that companies can successfully enhance performance quality through effective application of prominent micro and macro economic theories. This research work has thoroughly assessed the commercial opportunities and challenges faced by Apple Inc. by considering certain popular microeconomic theories. It has proved that increasing income of the consumers, open door policies of the government authorities and favourable preference pattern of the buyers have contributed towards increasing the revenue of Apple Inc. with passage of time. The company tries to enhance its technological expertise in order to lead in the competitive market. Nonetheless, it is found that increased substitution effect and price wars is lowering market share of the organization. Also, high R&D investments are responsible for diminishing the company’s economic surplus amount. After considering such factors, the researcher has realized that Apple Inc. must lower the prices of products offerings so as to render them more competitive in the market. Apple Inc. should implement a new penetrating or competitive pricing strategy for ensuring increased sales in long run (Apple, 2013). Reference List Altman, M., 2000. 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