Milestone I
Apple Inc. was founded on April 1, 1976, which makes it 40 years old. There is something to say about a company that has been around for that long; they must be doing something right. There were three different kinds of computers starting with the Apple I, Apple II and the Macintosh. The Apple I had a typewriter like keyboard with the ability to connect to the TV for the screen. These were all built by hand. The Apple II arrived in April, 1977 and with this came color graphics and a tape based machine. Then in 1984 Macintosh was introduced to the “older machines” that we might remember. By 1990 Apple had a lot of products and a lot of stock but were missing customers. Shortly after 1990 Apple came out with all of the products that we are familiar with in our world today. Apple has come a long way since 1976.
Apple Inc. is a company that now designs, manufactures, and markets several communication items. Those items include such things as mobile communication, media devices, personal computers, portable digital music players, and sell a lot of software, services, accessories, networking solutions, and applications.
The company’s products include things such as the iPhone, iPad, Mac, iPod, TV’s, The iOS and OS X operating systems, iCloud and support systems. iPhone is Apple’s smartphone line that is based on the iOS operating system, which is a Multi-Touch operating system and currently in its ninth generation iOS 9 (Apple, 2015). The smartphone itself is already in its sixth generation design (iPhone 6s and iPhone 6s Plus). It contains software, such as Siri and Apple Pay. It is compatible with Mac and Windows PC and works well with App Store, iTune Store, and iBooks Store for mobile shopping, organizing, and digital playing.
iPad, which includes iPad Air, iPad mini, and iPad Pro, is Apple’s multipurpose tablet line also based on the iOS operating system (Apple, 2015). It includes the software Siri and Touch ID. Its new release, the iPad Pro, is 12.9-inc size with Retina display. Like iPhone, iPad is also compatible with Mac and Windows and works well with App Store, iBooks Store, and iTunes Store. However, unlike iPhone, iPad is experiencing in the last two years negative net sales figures per unit, which resulted to income loses for Apple.
Mac is Apple’s desktop and portable PC line based on the in-house developed operating system OS X, which is based on an open-source UNIX structure (Apple, 2015). Its desktop PC line already includes the iMac, iMac with Retina 4K Display (screen size: 21.5”), iMac with Retina 5K Display (screen size: 27”), Mac Pro, and Mac mini. Its portable PC line includes MacBook, MacBook Air, MacBook Pro, and MacBook Pro with Retina display.
They also have the market on iBooks and Mac Apple store. Apple is also tied in with iTunes, which is a big income source for Apple. Apple sells its products worldwide through their own retail stores, third-party cellular network carriers, wholesalers, retailers, and direct sales force. Apple also sells third-party iPhones, iPads, Mac and iPod compatible products, which includes application software and accessories (e.g. Apply TV, Apple Watch, and iPod) (Apple, 2015). This is done mostly online and through their retail stores. The company sells to pretty much anyone, from small private sales, mid-sized businesses, large corporations, government customers, and education facilities. Apple was established in 1977 in California. According to Apple Investor Magazine (2015) the company has 92,600 full time employees and 4,400 temporary employees.
At the end of 2015 the annual sales for Apple for America alone was 65,232 million. It shows a continual growth, followed by Europe with sales at 40 million. Meanwhile, net sales in the Greater China market proved strong at 84.0 percent; in fact, the strongest growth rate among the operating markets, including the American market itself. However, it followed the American markets in terms of sales figures, occupying the second highest net sales globally, followed by Europe (Apple, 2015).
In its total net sales of $233.7 billion and 27.86 percent increase from that in 2014 and 115.9 percent growth since 2011, domestic net sales (DNS) accounted for 35 percent while international net sales (INS) accounted for 65 percent (Apple, 2015). This figures are driven by the year-on-year 52.0 percent growth of the iPhone net sales ($155.0 billion), supported by increases in the sales of Mac, Services, and other less front-lined products. The launch of Apple Watch in 2015 more than doubled the year-on-year net sales of the Other Products category. iPad, however, declined in sales growth by 23.0 percent as a consequence of a declining unit sales by 19 percent. It was the second year of decline for iPad. Furthermore, in terms of unit sales by product, iPhone accounted for more than half of Apples’ major product unit sales at $2321.1 billion compared to the combined sales of $75.4 billion for iPad and Mac.
Moreover, the 2015 net sales occurred through direct (e.g. company-owned retailers, online stores, and direct sales force) and indirect distribution channels (e.g. third-party cellular network carriers, wholesalers, retailers, and value-added resellers), which accounted for 26 percent and 74 percent of its total net sales, respectively (Apple, 2015).
The market is continually changing with new production introductions and rapid technological advances. Apple Inc. is able to reach a huge number of markets with all of the different products that they offer. They are constantly creating products that are not on huge demand and then once they hit the market they are some of the highest demanded products around the world. However, Apple is focused on expanding its markets in PC, mobile communication devices, and media devices, which is currently highly competitive. Its markets are categorized into consumer, small and medium-sized businesses (SMB), education, enterprise, and government markets (please refer to Milestones IV) (Apple, 2015). Interestingly, Apple did not report on its net sales by customer segment.
Competition for Apple is extremely competitive with so many of the same things being manufactured. The extent of competition in its markets revolve around principal competitive factors, such as product features (e.g. security), price, association between price and performance, product quality (e.g. reliability), design innovation, third-party internal product ecosystem (e.g. software and accessories), marketing and distribution strength, services and after-sales support, and corporate image and reputation (Apple, 2015). New product competitive factors involve market development timeliness and success), market acceptance, successful risk management (e.g. over ramp-up issues), application software availability, soundness of inventory levels and purchase commitments in relation to product demand anticipation, right quality within right costs, and defect or deficiency levels (Apple, 2015). However, Apple admitted that such factors cannot be accurately determined in advance particularly when involving new products in transition or recently introduced. The estimation uncertainty is exacerbated by the potential risks involved in purchase commitment cancellation from large-volume customers and obsolescence.
Apple is hit with markets that are their competition with every aspect of their business and in everything they sell. Competitors in the PC and mobile device markets involve numerous multinational companies with large assets (including human and financial resources) and long experience in the industry (Apple, 2015). The other companies, Samsung, LG, and Dell are continually lowering their pricing to maintain their market shares. Apple has a continual competition as several companies imitate their features on the Company’s products and applications. Apple needs to stay a step above the rest of their competition by developing and offering new innovative products and services in every one of their products.
Milestone II
I was unable to find the information on price and quantity for Apple Inc.
Elasticity is an economic concept intended to examine the relationship between price and the product demanded in the market. Thus, it reflects the level of the market’s responsiveness to the product being offered. In effect, a good understanding of a product’s demand elasticity can help decide how the product must be priced to maximize demand opportunities (Boyes & Melvin, 2016). Moreover, consumer sensitivity to changes in product prices is influenced by such factors as the nature of the product (e.g. necessities have normally a relative inelastic demand), close substitute availability (i.e. substitutes increases demand elasticity), share on the consumer budget (e.g. little share in the budget portion tend to be demand inelastic), and time passage (e.g. long run products tend to be more elastic than short run products).
Using the mid-point method to find the elasticity of demand the equation is as follows: (Q2-Q1)/(Q2+Q1)/2 divided by (P2-P1)/(P2+P1)/2. When the numbers are dropped into the equation it looks like this: (4300-5000)/(4300+5000)/2 divided by (125-100)/(125+100)/2. This gives us -.15/.22=-.68. Apple Inc. products are inelastic because it is between 0 and 1 in absolute value. In concrete terms, demand is elastic when a 10 increase in price by 10 percent reduces the demand quantity by at least 10 percent. Conversely, demand is inelastic when a rise in the product price reduces its demand by at least below 10 percent (Boyes & Melvin, 2016).
In effect, economists generally assume that price increases consequently and, at times, even automatically result to declines in the quantity of product demanded in the market (Boyes & Melvin, 2016). Thus, when the price change involves a positive number (an increase), the change in demand will be ordinarily negative (a decline). Similarly, when the price change constitutes a negative number, the demand change will be positive. It is common for companies like Apple Inc. to be inelastic because they have very differentiated products. Having a negative number means that when prices rise the quantity demanded fall, which makes these goods “normal goods”. With -.68 people are not switching to the competitor goods when the price rises.
The power of the Midpoint Method, when used to estimate the demand elasticity of Apple products, centers on the size of the value h, which is equivalent to n + 1 (Press, Teukolsky, & Flannery, 2007). Thus, h varies relative to changes in the n value. The errors found in the powerful Bulirsch-Stoer technique can be evened out when expressed as a power series in the value h. When n is evened, it can result into a high-level fourth-order accuracy similar to that in Runge-Kutta approach, making the Midpoint Method a robust estimator of price elasticity.
Apple Inc. has both economies of scale and scope. Economies of scale exist when long run average costs decline as out puts expand (Hirschey, 2009, Pg. 295). Economies of scope exist when the cost of joint production is less than the cost of producing multiple outputs separately (Hirschey, 2009, Pg. 311). Both economies of scale and scope have to do with costs specifically how costs change as output or size of the company changes. When the production allows per unit costs to fall as the number of different products offered increases, then they are more likely to offer a larger number of different products to take advantage of this. Since Apple Inc. offers a lot of different products they have economies of scope. Similarly, since it produces a large number of each type of product offered Apple Inc. also has economies of scale.
Milestone III
The production function, y = f (x), determines the maximum quantity of a single-batch production output for a given input quantity, x (Henningsen, 2014). In a sense, the production function, y, is the quotient of the input quantity, x, and the output quantity, y; thus, f = x / y. Subsequently, using the initial quantity (Q1) value of 5,000 units as x and the output quantity (Q2) of 4,300 as y (as mentioned in Milestones II), the equation will be as follows: f = x / y; f = 5,000 / 4,300; or f = 1.16, indicating a 16.0 percent higher input quantity requirement to product a lower output quantity and a production factor that showed production inefficiency.
This calculation, however, makes an important assumption that involves a cost minimization tactic through the concept of size elasticity, which states that size elasticity is always, or at least, equal to the scale elasticity (Henningsen, 2014). Size elasticity then is defined as the inverse of cost flexibility, which, in itself, is the ratio between the total costs’ relative change and the output quantity’s relative change.
Milestone IV
Apple operates within the personal computing (PC) industry, which originally started through an open system standard that adapts the standards of the original IMB PC. In this system standard, PC developers works on the modular, open system, and standard interfaces of the IBM PC and make modifications and improvement on these for specific use in their products’ system and interfaces (Dedrick & Kraemer, 2008). Consequently, it resulted to the explosion of suppliers globally through the production of components, parts, systems, and peripherals that is capable of achieving economies of scale at global magnitude as it adopts a common standard.
All players in the PC industry adopt the open system standard, except Apple. The standard did not set well with Steve Jobs because it threatens to undermine Apple innovations through unregulated copying acceptable in the open system standard. Instead, the company preferred to establish its exclusive system and interfaces, reserved for Apple products only. This countertrend policy established the closed system standard. In this standard, Apple design, create, and develop all its product solutions, from hardware to operating system applications. Moreover, adopting this standard removed Apple from the global network of suppliers, which caused the global boom in the PC industry, limited Apple’s supplier base but protected its intellectual rights over its solutions. For instance, its OS X software managed to only gain a minor share in the PC operating system market, which is dominated by Windows and resulted to its gradual contraction each year (Apple, 2015).
Further, Apple customers can be categorized into five different markets according to customer groups: consumer; small and medium businesses (SMB); education; enterprise; and government (Apple, 2015). The consumer market consists primarily of the customers served by direct retailers, indirect retailers, and resellers, while the SMB, the educational institutions, and the government agencies comprise its institutional customers.
If Apple’s approach in introducing the new Apple Watch to the market should be considered a standard Apple pricing strategy, considering the usually high-end pricing it approached its products despite allowing a wide price range ($349 to $17,000) across the product line (Mohammed, 2015), then Apple’s pricing approach is essentially price skimming, a strategy commonly used in newly introduced products and aimed at maximizing profits by demanding the highest price possible for the product, which is expected to experience high demands at least from certain specific market segments (Sammut-Bonnici & Channon, 2016). Mohammed (2015) criticized this approach as supportive of planned obsolescence within a year of product release, limiting of accessibility due to high pricing, and unfocused for the extremely wide price range. However, the high-end and wide-ranged pricing possess an intrinsic rationale that effectively widens the market range across such price range instead of being a strategic weakness.
Milestone V
Major business news organizations in the United States, such as Bloomberg, The Wall Street Journal, Forbes, and CNN, trumpeted the equality in current Chief Executive Officer Tim Cook’s top executive compensation. Except for Cook alone, Apple’s top five executives received equally some $25 million each in 2015. According to Melin and Satariano (2016) of Bloomberg, this compensation consisted of $5 million in salary plus cash bonus and $20 million in stock awards. Meanwhile, Cook himself received $2 million in salary and $8 million in cash bonus in addition to 560,000 restricted stock shares valued at $64.2 million at yearend.
The principal-agent issue over executive compensation has been around since early twentieth century (Bebchuk & Fried, 2003). It centers on the executive power and discretion over their own compensation, which inevitably created an ethical as well as a legal problem with the principal and agency relationship between executive employees and the shareholders. This executive power provides top managers with the discretion to decide on increasing their compensation, either through cash bonuses or stock shares awards, instead of distributing excess cash to the shareholders as dividends. Thus, this problem goes directly into the fundamental agency problem involving management decision making whether such decision results to support the interests of the shareholders (the principals) or that of the executives (the agents).
The power of the top executives, particularly the Board of Directors, can be put in check by the collective power of the shareholders to regulate the allocation of resources within the organization through the Board. In the sense, the shareholders can exert political influence to control the upper limits of executive compensation. However, in the absence of information by which executive compensation is regulated in Apple, it will be hard to speculate if the current compensation level of the top five executives set at $25 million in salary and bonus (Melin & Satariano, 2016) violates the principal-agency relationship. Nevertheless, the open disclosure of these information in the annual reports and to the media indicates that this compensation package has been under the explicit awareness and approval of, and thus authorized by, the shareholders.
Milestone VI
Government Agencies, as customer group, constitutes one of the institutional market segments of Apple by customer category. In addition to this trade transactions with the government segment, Apple also holds transaction debts with the U.S. government through its purchase of U.S. Treasury securities and U.S. agency securities as risk-free investment vehicles. At adjusted cost, the company holds a government debt of $34.9 billion as U.S. Treasury securities and $5.8 billion as U.S. agency securities (Apple, 2015) as of the yearend of 2015.
Moreover, application Apple Pay, Apple’s mobile wallet software, also received approval by the U.S. federal government in 2015 to receive payments from customers to the federal government through iPhone units (Hughes, 2015). Since September, business transactions with the federal government can be completed through Apply Pay. The app utilizes a tokenization concept to effect the exchange of electronic cash for each government transaction completed. This development further provided Apple the opportunity to also provide support to federal payment cards, such as the debit cards issued by the Social Security and the Veterans.
In 2015, moreover, Apple’s cellular network carriers owed the company trade receivables, representing 71 percent of the total trade receivables (Apple, 2015).
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