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Current Market Conditions Competitive Analysis

Stacey Troup

Principles of Microeconomics/ECO-365

August 1, 2016

Ashok Padhi

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Current Market Conditions Competitive Analysis

This Week 3 paper will serve as an analysis of current market conditions facing Apple,

Inc. Throughout this paper I will identify the type of market the product will compete in along

with an analysis of the competitors and customers; I will analyze comparative advantages and

international trade opportunities while explaining factors that affect demand, supply and prices

of the product. An analysis will be done examining factors that affect total revenue including

price, factors that affect productivity, and various measures of cost including opportunity cost.

A review of the externalities and government policies and their effect on marginal revenue and

marginal cost will be done along with providing recommendations on how the organization can

maximize profit-making potential and increase presence in the market.

Apple, Inc.

Apple, Inc. is a worldwide leader in computer hardware with product offerings including

mobile phones, software, peripherals, and applications. While much speculation exists as to the

standing of Apple as a monopoly, the company does not consider it as such and industry insiders

decline to refer to it as such stating “it depends on how you define the market” (Elmer-DeWitt,

2011).

Competitors & Customer Analysis

While Apple maintains its position as #1 in Most Valuable Brands along with #1 in Profit

on the Forbes list (Apple on the Forbes Global 2000 List, 2016), it struggles to maintain its

industry position against rival competitor Samsung.

Holding brand loyalty among customers with its “Cult Marketing” tactics (Schneiders,

2011), it becomes increasingly difficult to hold its favorable business position over its

competitors due to its vast overhead consisting of 489 stores in 18 countries and additional staff

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required to operate these locations which cut into its overall profitability. However, Apple’s

customers are fiercely loyal to the brand sighting its superiority over Windows™ and the

Android™ platforms (Evans, 2014).

Apple is said to have the strongest competition against Samsung when new versions of

the phone are released (Evans, 2014). Customers can be seen worldwide standing in line at their

local Apple store for the newest releases of the IPhone while Samsung prefers to do its

marketing via television ads featuring celebrities doing incredible things (as is the case with the

Galaxy S7 Virtual Reality Headset) with the new versions of their phones.

Comparative Advantages & International Trade Opportunities

With Apple’s 489 stores globally, they position themselves for not only their loyal

customers but for customers who may be undecided on their cell phone purchase when entering

the store. In addition to those retail locations, they partner with major electronics stores in order

to saturate the market with a bevy of offerings from the company.

Alternatively, Samsung keeps its overhead low by simply partnering with these same

retailers to push its brand. Counting on the outlets of mobile phone retail stores and big box

retailers of electronics, they are able to staff more people for the production side of the business

rather than the retail operations. One may view this as a negative rather than a positive but it is a

market strategy that has worked for Samsung.

Apple’s sales totaled $233.27B in 2015 with a staff of 110,000 while their profits were

$53.73B worldwide (Jurevicius, Apple SWOT Analysis, 2016). By way of comparison,

Samsung employed 236,000 employees across all divisions including mobile phones and

televisions in addition to their vast product offering of over 100 individual consumer electronics.

Samsung’s profits in 2015 were up 28% to a staggering $28B (Chew, 2015).

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Both companies have a stronghold internationally on their respective brands and very

little can be done to further these marketing efforts beyond their current offerings. Apple did

try to expand its offerings by introducing the Apple Watch. Analysists speculate (as the

company refuses to say exactly how many were sold) that sales of the Apple Watch were around

5M in 2015. However, sales in 2016 fell short of its opening week sales of 200,00 units and

declines continue yet the price remains around $300.00 for the device (Zofagharifard, Ellie,

N.D.)

Factors Affecting Supply, Demand, and Prices of the Products

The Law of Demand dictates that the higher the price of an item, the lower the demand

for the item and vice versa.

When we discuss prices of products, it is important to consider the fixed costs such as

rent, utilities, wages, and taxes, which are part of the production process. In addition, tangible

costs such as the cost of materials to produce an item are also part of the final price factoring of

an item. Apple has reduced its production costs historically but has failed to turn these savings

over to the consumer (U.S. iPhone Pricing History, N.D.).

In addition to the savings Apple has found in terms of its materials cost, in 2014 the

Chinese government lifted tariffs for imported parts used for manufacturing of these mobile

devices (Lovejoy, 2014). The hope with this government policy is that apple will further reduce

the pricing of its products to the consumer as they did with the Mac Book Air in 2014 following

this incentive. However, as of 2016, Apple has done little to improve anything but the camera

feature on their phone, yet has continued to increase its pricing. The die hard, loyal fans of

Apple continue to shell out over $600.00 for a new device yearly which drives the demand up

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for Apple, keeping the prices high rather than reaching equilibrium (U.S. iPhone Pricing

History, N.D.).

In 2015, Samsung sought to entice loyal iPhone buyers by offering a free Virtual

Reality® headset with the pre-order of a Galaxy S7™ phone through authorized retailers. This

was done to help not only incentivize buyers into leaving their iPhones but to also gain a greater

market perspective on the supply curve for the suppliers. The promotion (or incentive) to buyers

was a device valued at $200.00, free with purchase and was included as a massive marketing

campaign featuring rapper Lil Wayne and Wesley Snipes on television advertising including

placement of ads during the Superbowl™. The promotion was resurrected again in 2016 to

coincide with purchases for Father’s Day and included a free year of Netflix™ and a games

package for the VR headset valued at $50.00.

These never before seen features drove people to purchase the Galaxy S7 who may not

have considered it before. This incentivized sales tactic greatly helped Samsung with its

equilibrium allowing for the right amount of devices to be made and ready by the due date.

Apple, Inc., however, has done little to change its phones outside the camera upgrade to

the iPhone 6 variations yet the consumers continue to buy them hoping for some magical

upgrade that will make the new device the “must have” item of the season. For Apple, brand

loyalty is key to its success.

Factors Affecting Total Revenue

There are several factors which have an overall effect on total revenue; the first of these

factors is total revenue. Total revenue can be calculated by multiplying the quantity sold by the

sale price. Next is average revenue which can be calculated by dividing total revenue by

quantity sold and is a factor having an effect on revenue. Finally, the marginal revenue is to be

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included in this factor. Marginal revenue is the change in total revenue from an additional unit

sold (Economics Online, N.D.).

The Price elasticity of demand is a tool for providing a visual representation of price and

quantity demanded while providing precise calculations relating to price changes in quantity

demanded (Economics Online, N.D.).

We can see from a review of Apple’s 2015 SEC 10-K Annual Report (Apple, Inc., 2015)

that the company lists several factors that affect overall total revenue and profitability as well as

price elasticity of demand and measures of cost. Among the listed concerns are negative

externalities such as global and regional economic conditions, tax liabilities both domestically

and internationally and litigation (such as the antitrust suit filed 2012) by the Department of

Justice. Additionally, Apple recognizes that it needs stronger supplier and partnership

agreements in order to keep costs low and continue to profit for its shareholders. Samsung and

Apple site currency exchange variations as a final factor affecting their profitability (Samsung,

2015) (Apple, Inc., 2015).

Productivity is affected by wages paid and the output of work provided by each worker.

It is said that the lower the rate an employee is paid, the less productive they are and the higher

the wage, the more productive the worker (Mankiw, 2015).

Opportunity costs for apple include the manufacture of larger screens and increased

memory for their devices. The trade off of an opportunity cost is reduced battery life and a less

happy customer as well as increased material costs to the production (Hufton, 2013).

Externalities & Government Policies

Several externalities and government (public) policies exist that have a negative effect on

the overall profitability of Apple. As previously mentioned, Apple was at the forefront of an

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antitrust lawsuit brought forward by the Department of Justice which it had to defend itself

against at the expense of its shareholders. Additionally, until 2014 cell phone manufacturers

who imported parts into china for manufacturing as well as exporting the final product out of the

country, came at a high tariff charge to the company until China released these tariffs and

allowed for more free trade in and out of the country (Lovejoy, 2014). Other issues facing the

profitability at Apple are the accusations of poor work conditions for overseas workers and the

pending sanctions by those countries to counter the negative conditions and defense of its patents

globally (Thierer, 2012).

Apple is no stranger to public policy debate and litigation and continues to be very public

about its defense of personal data retainment and release to the governments (both Federally and

internationally) sighting privacy rights (Thierer, 2012).

Profit Recommendations

As Apple continues its quest to remain a superpower in the realm of mobile devices and

in an effort to maximize its overall profits worldwide, they need to embrace cost-saving methods

including supplier contracts, cost reduction of its operating expenses and a review of its retail

operations.

Taking from the financial statements of Apple, Inc. we learn that the profits are greatly

impacted by litigation and retail operations. The operational cost of running the 480(ish) stores

that Apple currently owns cut into their profits at a negative rate (Apple, Inc., 2015).

Additionally, we learn that Apple takes advantage of tax loopholes in its yearly returns that help

it maintain profits (NASDAQ, 2013).

Opening their minds to partnerships similar to those held by Samsung™ would further

their brand loyalty, increase their sales and, inevitably, improve their bottom line. Consider how

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Samsung™ phones were selling in the market prior to the partnership with Google.

Additionally, improving functionality would drive more customers to their brand.

Conclusion

What we glean from this review of the business operations at both Apple and Samsung is

that they are both strong in the mobile device business, however, Samsung is a world leader in a

vast array of consumer electronics. Apple, while they have tried (unsuccessfully) to launch

alternative products, have failed to recognize the needs of their consumers for added features and

lower prices.

Managing supplier relationships and keeping operational, fixed and opportunity costs

will result in a greater bottom line, improved customer loyalty, and better overall profitability to

its shareholders.

It is imperative to form partnerships with technology companies in order to further your

already solid product offering as the mobile device market is always looking for the latest and

greatest features, something Apple has failed to do thus far.

Considering their overzealous retail store offering, by closing some of these stores in

favor of these partnerships with big box electronics retailers as well as mobile phone suppliers,

they could boost profitability as well.

While Apple is strong, it is evident that their unit cost has only gone up over the years

with no real cause for it other than the supply and demand curve coupled with brand loyalty. If

Apple were a car company, they wouldn’t have the same success as features always need to

change with the times to show a value for the product beyond just the brand name.

If Apple considered a partnership with Samsung™; consider the possibilities. Apple

operating system applications for your mobile phone that control your air conditioners,

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refrigerators, washing machines, etc. This partnership would truly bring not only Apple, but the

consumer, into the future.

References

Apple on the Forbes Global 2000 List. (2016, 05). Retrieved from Forbes:

http://www.forbes.com/companies/apple/

Apple, Inc. (2015). Investor Relations - Apple, Inc. Retrieved from Apple:

http://files.shareholder.com/downloads/AAPL/2543327150x0x861262/2601797E-6590-

4CAA-86C9-962348440FFC/2015_Form_10-K_As-filed_.pdf

Chew, J. (2015, 10 07). Here's Why Samsung's Profits Are Up Nearly 80%. Retrieved from

Fortune: http://fortune.com/2015/10/07/samsung-profits-third-quarter-2015-chips-galaxy/

Economics Online. (N.D.). Price Elasticity of Demand. Retrieved from Economics Online:

http://www.economicsonline.co.uk/Competitive_markets/Price_elasticity_of_demand.ht

ml

Elmer-DeWitt, P. (2011, 02 16). Does Apple Have a Monopoly? Retrieved from Forbes:

http://fortune.com/2011/02/16/does-apple-have-a-monopoly/

Evans, J. (2014, 03 31). Apple is Beating Up Samsung in Brand Loyalty. Retrieved from

Computerworld: http://www.computerworld.com/article/2476076/apple-ios/chart--apple-

is-beating-up-samsung-in-brand-loyalty.html

Hufton, N. (2013). Apple, Inc. Retrieved from Prezi: https://prezi.com/syaqriscvs7g/apple-inc/

Jurevicius, O. (2016). Apple SWOT Analysis. Retrieved from Strategic Management Insight:

https://www.strategicmanagementinsight.com/swot-analyses/apple-swot-analysis.html

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Jurevicius, O. (2016). Samsung SWOT Analysis 2016. Retrieved from Strategic Management

Insight: https://www.strategicmanagementinsight.com/swot-analyses/samsung-swot-

analysis.html

Lovejoy, B. (2014, November 12). US-China trade deal set to reduce manufacturing costs for

Apple, aims to cut prices for consumers. Retrieved from 9 to 5 Mac:

http://9to5mac.com/2014/11/12/us-china-trade-deal-set-to-reduce-manufacturing-costs-

for-apple-aims-to-cut-prices-for-consumers/

Mankiw, N. (2015). Principles of Microeconomics. Retrieved from

https://phoenix.vitalsource.com/#/books/9781305892811/cfi/6/10!/4/2/2@0:0.

NASDAQ. (2013). Apple vs. Samsung - A Financial Comparison. Retrieved from NASDAQ:

http://www.nasdaq.com/article/samsung-vs-apple-a-financial-comparison-cm270771

(2006). Other Electronics Industries. In M. Pecht, China's Electronics Industry (pp. 194-196).

Norwich, NY: William Andrew Publishing. Retrieved from

https://books.google.com/books?

id=HlWKB72XiAwC&printsec=frontcover#v=onepage&q&f=true

Samsung. (2015). Quarterly Report 2015. Retrieved from Morningstar:

http://quote.morningstar.com/stock-filing/Quarterly-Report/2016/3/31/t.aspx?

t=:SSNLF&ft=&d=90e91e535cd38a90cc84e08c38001b12

Schneiders, S. (2011). Apple's Secret Of Success - Traditional Marketing Vs. Cult Marketing.

Diplomica Verlag. Retrieved from

http://site.ebrary.com.contentproxy.phoenix.edu/lib/apollolib/reader.action?

docID=10489141

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Thierer, A. (2012, April 8). Regulatory, Anti-Trust and Disruptive Risks Threaten Apple's

Empire. Retrieved from Forbes: Regulatory, Anti-Trust and Disruptive Risks Threaten

Apple's Empire

U.S. iPhone Pricing History. (N.D.). Retrieved from Applinvestors:

http://aaplinvestors.net/stats/iphone/pricing/

Worstall, T. (2014, 09 03). The Effect Of Apple's New iPhone On China's Exports, Trade

Balance And GDP. Retrieved from Forbes:

http://www.forbes.com/sites/timworstall/2014/09/03/the-effect-of-apples-new-iphone-on-

chinas-exports-trade-balance-and-gdp/#190d85f12033

Zofagharifard, Ellie. (N.D.). Apple Watch is a FLOP: Sales of the gadget have fallen by 90%

since April, report claims. Retrieved from Daily Mail:

http://www.dailymail.co.uk/sciencetech/article-3152514/Apple-Watch-FLOP-Sales-

gadget-fallen-90-April-report-claims.html