Evaluation of Apple Incorporation`s Managerial Decisions

APPLE INCORPORATION’S MANAGERIAL DECISIONS 1

Evaluation of Apple Incorporation’s Managerial Decisions

Evaluation of Apple Incorporation’s Managerial Decisions

In the contemporary business environment, organizations facedaunting pressure from the government, society, and stakeholders toinstitute, design, strategize and implement sustainable managementpractices. Adherence to regulatory requirements and the developmentof effective frameworks allow companies to identify success factors,as well as, attain productivity and profitability. However, themanagement needs to strategically develop a dynamic communicationstructure, decision-making process, and environmental sustainability.Competition, industry, and financial risks, shifting markets, andinnovation may inhibit a firm’s ability to succeed thus, the needfor the management to make effective decisions. The report willprovide an extensive discussion on Apple especially its operations,policies, service improvements, challenges, and the decision-makingprocesses and aspects. Furthermore, the assessment will include thefirm’s financial reports, profitability, and the developedstrategies geared toward market changes and rivalry. The analysis ofApple’s managerial decisions in reaction to the environment andmarket changes will help to show the approaches developed, as wellas, the outcome of the choices to the firm’s financial position.

Background: Operations and financial performance

Apple models, develops, markets, and sells software, hardware, andconsumer electronics. The firm has historically profited frominnovation, rapid growth, and strong loyalty and brand (Chan, Pun, &ampSelden, 2013). Apple’s competitive advantage lies in its control ofsoftware and hardware, retail strategy, product variation (forexample, iPhone, MacBook, iPod, iPad), digital asset management,promotion, and strategic judgments. The company was co-founded bySteve Wozniak, Steve Jobs, and Ronald Wayne to develop, market, andsell Apple 1 PC kit. Incorporated 1977, the company has over 110,000employees and 463 retail stores (Apple Incorporation, 2016). In 2015,the company’s total revenue was about US$233 billion from its salesof iPhones, MacBook, iPads, Apple Watch, software and apps, Apple TV,iPod, and iMac (Apple Incorporation, 2016). The company launched itsMacintosh in 1984, but because of its high price and limitedsoftware, the product was not a hit. However, the product sold wellafter the introduction of PageMaker and LaserWriter. Between 1991 and1997, Apple experienced restructuring, acquisitions, and declines dueto the introduction of unsuccessful products, such as, digitalcameras, TV appliances, video consoles, and CD players (Jun &ampSung Park, 2013). The Mac OS also failed during this period and it isonly after Steve Jobs was brought back in 1997 did the company returnto profitability.

Apple has been experiencing revenue growth due to its robusttradition of innovation. Its thirteen-year data shows that Apple’srevenue has been increasing with a positive impact on totalprofitability until 2013. The graph below indicates Apple’s revenuetrends since 2005 on a quarterly basis for every financial year.

Figure 1

Apple’s revenue trend between 2005 and 2016

Data retrieved fromhttps://www.statista.com/statistics/263427/apples-net-income-since-first-quarter-2005/

As indicated in the graph, Apple’s profits usually increase duringthe fourth quarter of a financial year, when new products arelaunched. The fourth quarter also coincides with holiday seasons thatare characterized by huge sales. In 2015, Apple had $78.9 billion inrevenue, which generated $18.4 billion in profits that was mainlygenerated in the last quarter of the year when iPhone 6. The marginsincreased to 40.1 per cent. The trend of the Company’s revenuegeneration and profitability changed in 2016. The graph below showsApple’s recent changes in revenue generation and profitability.Apple’s profitability and income have improved from 2013 to 2016.In the second quarter of 2013, profits stood at US$9.5 billion andrevenue at US$43.6 billion while in the first quarter of 2016,profits stood at US$18.4 billion and revenue at US$75.9 billion(Popper, 2016). The illustration means thatsales of iPhones, iPads, consumer electronics, and other productscontinue to push the financial performance of Apple.

Figure 2:

Apple revenue and profit between 2013 and 2016

Retrieved fromhttp://www.theverge.com/2016/1/26/10828134/apple-earnings-report-first-quarter-q1-2016-record-profit

Risks and uncertainties in operations and government regulations

Apple has a great presence in China where harsh laws and guidelinesaffect the company’s value (Litzinger, 2013). For example,protocols in China connected to software security, systems, andcommunications usually vary according to political situations in thecountry, which affect Apple’s assembly, rights, software usage,strategy, and application (Gong, 2013). In addition, China has anineffectual tax system and a different tax rate from that of America,which greatly shrinks the promotion rate of Apple’s services andproducts. Censorious results of legal proceedings as seen betweenpatent legal proceedings between Apple and Samsung have materiallyaffected the company’s value (Gong, 2013 Jun &amp Sung Park,2013). Since political risk acts as a macro modification in acompany’s operations, it adversely affects a company’s operatingcosts and activities thus, reduced profit.

Essential components of the Company’s line of production areavailable from various sources through its innovative outsourcingstrategy. However, there other components that are equally importantto the Apple’s production line yet they are sourced from a singlevendor. They include components such as enclosures,application-specific integrated circuits, certain optical drives,certain liquid crystal displays, and even microprocessors. The factthat Apple obtains these components from a single vendor or on alimited supply source means that it is vulnerable to pricing andsupply risks. Besides, other production components obtained frommultiple vendors also have their own risks, as they are prone toindustry-wide shortages and price fluctuations. The risks anduncertainties associated with pricing and supply have prompted AppleInc. to enter into some agreements with various business partners toboost the supply for major important components, such as, NAND flashmemory, microprocessors, LCDs, and DRAM at favorable prices (Jun &ampSung Park, 2013). However, business outsourcing partnershipsinitiated by the Company do not eliminate the risks. As Litzinger(2013) puts it, there is no guarantee that Apple will have thecapacity to influence the renewal of outsourcing companies with itspartners upon expiry of existing contracts. Additionally, favorablepricing by its partners remains largely an operational incentive thatis subject to the discretions of the partners. Therefore, Apple Inc.is still subject to many risks associated with operations, forexample, supply shortages and price increases and others associatedwith government regulations.

Inputs used in the production function

The major components for most of Apple’s Inc’s productsinclude microprocessors, certain liquid crystal displays (LCDs),application-specific integrated circuits, metal and plastic materialsto make an enclosure, and certain optical drives. Apple Inc., likemany hi-tech companies, depends on outsourcing partners as a majorsource of its raw materials and logistical services. Much of the rawmaterials used by the company are found off the manufacturing site oroutside the U.S. The Company does not have immense on its productionline. Most these components are subject to price fluctuations andsupply shortages in the industry. Outsourcing has, indeed, been asignificant strategy that has enabled Apple Inc. to lower the priceof its premium products. However, there are industry-wideuncertainties on whether such reduced control on the supply chain ofinputs affects the quality or quantity of its products.

Apple uses some custom inputs that are not common in the PCmanufacturing market or in the consumer electronics industry. TheCompany uses the custom components to make new products it introduceson the market. The biggest challenge about custom inputs is that theyare only obtained from a single vendor until such a time when theCompany has determined that it needed them for a new product. In suchsituations, it has to quantify the number of additional suppliers foradditional component inputs. The Company experiences, and is likelyto experience, capacity constraints with custom inputs until a timewhen the supply yield of a particular vendor matures or when theproduction capacity of the new product increases to near optimalquantity. The supply of custom inputs is likely to affect thefinancial condition of Apple Inc. if one of the following issuesoccurs: 1) if there are delays in the shipment of a custom component,which is single-sourced. 2) If the available of custom componentinputs priced higher than the normal price due to other operationalcosts. The managerial impact of the challenges originating frominputs is that Apple’s management team will have to make astrategic decision on the right time required to obtain custom inputsfor new products using new technologies. Additionally, the Companyhas to find an alternative source of custom component inputs at anextra cost.

Introduction of new products in existing and new markets

In 2007, Apple began to diversify its product line from thetraditional PCs to mobile devices such as smartphones and tablets.The new products that were introduced include the iPad, the iPod, theiPhone, and the iWatch. There have been several series of the iPhonethat the Company has launched in close succession. The first wassimply called the iPhone launched in 2007, followed by the iPhone 3G,iPhone 3GS, iPhone 4, iPhone 4s, iPhone 5, iPhone 5C and iPhone 5s,iPhone 6 and 6 plus, iPhone 6s and 6s plus, and iPhone SE (AppleIncorporation, 2016). Apple also has an application store where allits customized software programs are found through cloud connectivityand an Apple television set. The Company’s new markets are mainlyin East Asia and Africa, which have contributed to an increase ininternational sales. The products caused an overall increase inearnings but at a decreasing rate. About 63 percent of sales from newproducts were international sales, meaning that Apple’s marketshare at home is gradually waning. Upon the introduction of iPhone 6and 7, quarterly margins dropped from $ 49.6 billion in 2015 to $42.4 billion in 2016 (Popper, 2016).

Price fluctuations to demand elasticity and close substitutes

The price elasticity of Apple’s products can be dividedinto two major sections. The first segment is about ten years agowhen the Company dominated the high-end market. During the firstphase of its innovative period, the elasticity of demand for itsproducts was largely inelastic. High-end consumers were onlyresponsive to the quality of the product rather than its premiumprice. The second phase of Apple’s innovative period has beenoccasioned by fierce competition from other companies such asSamsung, Microsoft, and HTC. They have products that are closesubstitutes for Apple products at a cheaper price. The economicrecession shrunk the high-end market and competitors also offeredalternative products. Thus, its demand curve has gradually becomequite elastic because the total sales have been significantlyresponsive to price and the quality of competing products. Thepricing decisions of the Company are therefore increasingly becomingdependent on the prices set by competing products on similarproducts.

Apple’s profitability: Industry influences on costs,profitability, and operations

The state of the economy affects Apple sales regardless ofits target market being high-end customers. During the 2008recession, the overall sales declined and they have been increasingduring the slow recovery (Thomas &amp Alluru, 2016). The state ofthe economy affects disposable incomes of consumers meaning thatcustomers are more likely to but alternative substitutes at cheaperprices during economic recessions. Additionally, the Apple’s recentfall in revenue and profitability is attributable to a shrinkingmarket share. Competitors such as Samsung, Microsoft, and HTC haveincreased their market share and subsequently caused Apple’s marketshare to reduce. With more PC manufacturers entering the high-endmarket, the price of inputs has further increased the overall cost ofproduction. The result is a fall in profits occasioned with reducingcontrol of its production line.

The competitive environment

There are two fronts of competition for Apple Inc. First, othercompanies producing personal computers, consumer electronics, andmobile devices compete with the Apple for major inputs thatconstitute its production line. The second competition front is themarket share of the high-end PC market. There are other companiessuch as HTC and Samsung that are currently proving to be fiercecompetitors of the Company. The PC and software market is amonopolistic competition where firms differentiate their products inorder to justify higher prices and there are many barriers to entry.They also carry out market segmentation as a differentiatingstrategy. Apple has a robust R &amp D corporate culture that enablesit to differentiate its products for high-end users. The Company alsosells products at prices for various markets (Chan, Pun, &ampSelden, 2013). Customers from low-income countries buy Apple’sproducts at relatively cheaper prices than their counterparts inhigh-income countries.

Recommendation: Decision errors and service improvements

Perhaps, the biggest mistake that Apple has ever done is thesustenance of its closed approach. Edson and Beck (2013) posit thatin 1985, Bill Gates asked Apple to license its operating system toother firms, but Apple ignored the advice and 5 months later,Microsoft released and opened its system to other players. Chan etal. (2013) and Thomas and Alluru (2016) contend that Apple’s closedapproach caused it to flounder despite the company pioneering PCs afew years earlier. The mistake proved costly for Apple, as itsfinancials fell and ultimately bailed by Microsoft from bankruptcy.However, the firm was able to reinvent itself largely because ofSteve Jobs’ leadership and the decision to focus on design and theintegration of software and hardware. Today, the company facescompetition from firms, such as, Xiaomi and Huawei, which designphones comparable to iPhones leading to the shrinkage of its marketshare (Thomas &amp Alluru, 2016). Downloads from iTunes and AppsStore and subscriptions remain the firm’s largest income sourcehence, the need for Apple to port its iOS to some of its competitors.The move will help the company compete favorably with Android,increase its market share, and allow its ecosystem to become a bitopen. Since threats focus on issues of procedures, governmentguidelines, and market uncertainties, Apple can implement politicalrisk evaluations to assess the possibility of unsettling events,which can threaten its sustainability and foreign reserves. Moreover,the firm should embrace active management approaches, taskmanagement, and proactive management strategies, which would allowthe it to recognize and assess different strategies for combating thepolitical risks. For example, protracted quantitative examination toevaluate the concentration of political risk in a country. Predictingthe imminent situations of market changes and political risk mayoffer robust solutions for the Apple especially to deal withcompetition and government regulations.

Conclusion

The report has discussed the historical framework andmanagement strategies that Apple has adopted over time. A big portionof the deliberation has dealt with the uncertainties, market forces,and competitive environments that have influenced the firm’sfinancial performance and the decision-making process. Apple hasremained highly innovative, a market leader, and a recognized brandparticularly because of an effective leadership. The organization iscredited with pioneering PCs and smartphones, which arose fromrevolutionary decisions and creativity. Google, Microsoft, andSamsung remain the company’s greatest rivals largely because ofApple’s reluctance to open its software platform to other players.Apple’s closed approach helped Google open Android to other playerswhile Microsoft opened its Windows operating system to PCs makers.However, the firm continues to develop innovative products, forexample, iPad, Apple Watch, and iPhone, as well as, a highlyrecognized brand. Thus, the management decisions made over time haveled to greater competition but helped Apple become the most valuablebrand in the world.

Reference

Apple Incorporation. (2016). Form 10-K. Apple Inc. Retrieved 7October 2016 fromhttp://investor.apple.com/secfiling.cfm?filingid=1193125-15-356351&ampcik=#D17062D10K_HTM_TOC17062_19

Chan, J., Pun, N., &amp Selden, M. (2013). The politics of globalproduction: Apple, Foxconn and China`s new working class.&nbspNewTechnology, Work and Employment,&nbsp28(2), 100-115.

Edson, J., &amp Beck, E. (2013).&nbspDesign Like Apple.Hachette Audio.

Gong, Y. (2013). Rationale behind operational globalization. InGlobal Operations Strategy (pp. 69-98). Springer BerlinHeidelberg.

Jun, S., &amp Sung Park, S. (2013). Examining technologicalinnovation of Apple using patent analysis.&nbspIndustrialManagement &amp Data Systems,113(6), 890-907.

Litzinger, R. (2013). The labor question in China: Apple andbeyond.&nbspSouth Atlantic Quarterly,&nbsp112(1),172-178.

Popper, B. (2016). Apple reports a quarterlyprofit of $18.4 billion, the largest in history. TheVerge. Retrieved 8 October 2016 fromhttp://www.theverge.com/2016/1/26/10828134/apple-earnings-report-first-quarter-q1-2016-record-profit

Statista. (2016). Apple`s net income worldwidefrom 1st quarter 2005 to 3rd quarter 2016 (in billion U.S. dollars).Statista. Retrieved 8 October 2016 fromhttps://www.statista.com/statistics/263427/apples-net-income-since-first-quarter-2005/

Thomas, M., &amp Alluru, J. R. (2016). The disastrous consequencesof the Ikea Effect: Apple, Intel and Wang Labs learning the cost oftrue love. Strategic Direction,&nbsp32(1), 8-10.