Apple Inc. case study - Research Paper Example

? Economic Projects: Apple Inc Case Study Table of Contents Introduction 3 Background Information 3 Objectives of the Study and Hypotheses 5 Ipad Mini Demand 6 Price Elasticity of Demand 7 Ipad Mini Supply 7 Price Elasticity of Supply 8 Qualitative Forecast 9 Quantitative Forecast 12 Margin Analysis 15 Conclusion 15 References 17 Introduction In this thesis, one was supposed to select a company, government agency or any other service outlet and one of its products to study from an economic point of view. Apple Inc was selected for analysis in this research paper because of its recent growth and variety of quality products that have a high demand worldwide. Apple Inc produces and distributes over 35 products and services. For this research, Ipads were selected for analysis among the variety of products manufactured by Apple Inc. Apple Inc has produced a variety of Ipad models. All the models and their features will be analyzed in this research study. Information and financial data concerning Apple Inc will be obtained from articles from sources such as Business Week, Forbes, Wall Street Journal, Marketing Communications, Media-Scope, Advertising Age, web sources, and books. Primary data and information will also be collected from local Apple stores concerning their products sales, demand, supply from their factories, and information about their consumers’ purchasing power. This paper will use the demand and supply analysis model and concepts to evaluate the selected Apple Inc product. This research paper will also analyze the price elasticity of demand and supply of the selected products. The data collected from the selected Apple store will also be used to calculate the regression analysis, which be used to estimate the forecasted sales and demand for the Ipads. Lastly, the profitability and economic conditions of Apple Inc will be determined and recommendations given for future new or current products pricing. Background Information Apple Inc is an American multinational company that has its headquarters in Cupertino, California. This Multinational Corporation changed its name from Apple Computer Inc in January 9, 2007 in order to capture a wider market by producing a variety of products and services. Apple Inc specializes in designing, developing, and selling consumer electronics, computers, computer software, and other computer services. The corporation was established on April 1, 1976, and was latter incorporated on January 3, the next year. The introduction of the iPhone marked the start of a new era in Apple Inc since it widened its scope of products and services. Some of Apple’s best-known hardware products include the Mac line of computers, iPhone brand of phones, ipod brand of portable music players, and ipad brand of tablets and E-readers. Other hardware products designed by Apple Inc include Apple Keyboards, Displays, Magic Mousses, Time Capsules, Magic Trackpads, Apple Battery Chargers, AirPort Extreme, and Apple TVs. Apple Inc also offers software and other computer related service solutions. Some of its well-known software includes the OS X operating systems for Apple computers, iOS operating system for its phones and tablets, iTunes media browser, the Safari web browser, the iLife and iWork creativity and production suites, among others. Apple has also developed the iCloud sharing service where its products users can wirelessly store their content and share with other devices automatically. This thesis focuses on ipad brand of tablets and E-readers. The iPad is a brand of computer tablets designed to run an advanced version of the iOS operating system. The release of the first iPad took place on third, April the year 2010. These were the first generation iPads. However, there was discontinuing of production of the first generation iPad on March 2, 2011 when the second generation came into being. The second-generation iPad was an improvement of the first, with higher memory, processing ability and addition of new features. The iPad 2 are still available in the market. There was release of the third generation of iPads to the market on March 7, 2012. However, there was discontinuing of production nine months down the line. On October 23 of the year 2012, there was release of two iPad models, which are iPad 4 and iPad mini. This paper will specifically focus on the iPad mini because it has received the greatest publicity of all the iPads and has the highest demand. Objectives of the Study and Hypotheses For a product such as the iPad mini to be sold in the market, demand must exist. Definition of demand is the quantity of a product or service a customer is ready and willing to purchase at a given price, when all other factors affecting demand are held constant. These factors include changes in the income of the consumers, their tastes, and preferences, and prices of substitute products among others. There should be differentiation between demand, desires, and needs. An individual with a desire to purchase the iPad mini is not a demand, unless he/she has the purchasing power. Similarly, an individual with no need for an iPad, but has the purchasing power is no demand. The law of demand states that demand will always change inversely to price. The analysis of the iPad mini sales aims at establishing if this product follows this law of demand or not. The analysis will also help in identifying the nature of the iPad mini product, that is whether it is a normal good, inferior good, giffen good, luxurious good, a necessity, a complimentary, or a substitute good (Wessels 2006, 10). In order for the demand for iPad mini to be satisfied, there must be adequate supply in the Apple stores. On the launch-day of the iPad mini between 8am and 8pm, the Fifth Avenue Apple Store in New York sold over 13,000 iPads generating revenues of up $11.5 million. This was estimated to be selling iPads at a rate of 20 per minute for 12 uninterrupted hours. By so doing, the supply was able to meet that day’s demand, unlike the previous year when the Store experienced supply shortage. Supply is the quantity a producer is able and willing to deliver to the market at a specific price. The law of supply states that other things remaining constant, when price rises, supply increases, and when prices fall, the supply reduces. This study will establish whether Apple’s supply of the iPad follows this law. This thesis also aims at establishing the supply and demand curves of the iPad tablet computer produced by Apple Inc. In order to establish this, data regarding the sales, demand, and supply of iPad tablets will be collected from the Fifth Avenue Apple Store in New York. Ipad Mini Demand A report from Forbes (Savitz, 2012) states tablet computer sales are now approaching the smart phones’ mark, with a hit of nearly 67 million sales in the year 2011. The report also showed that over 66 million tablets were sold globally. Apple Inc commands a 58 percent market share of tablet computers shipping at list 15.4 million iPads worldwide. In the launch weekend, the Fifth Avenue Apple Store in New York was able to sell from 1 million to 1.5 million iPad minis. A single iPad Mini sold at around $329 to $529, based on the amount of memory and other specifications. At this time, the demand for the iPad tablets was at its highest. CNN Money revealed that the white iPad minis were sold out in just an hour after opening the Apple’s flagship store on Fifth Avenue. The black version of the iPads sold out in two hours. This clearly shows how demand was higher than the supply of the iPad Mini in the store. The ipad mini commanded roughly half of the tablet market in the third quarter. This was more than double Samsung’s market share. Recent surveys have found that iPad customers are still willing to buy the product, but possibly not in the same numbers as that of the launching weekend. The figures show a drop in demand for the new Apple product by 26 percent. A research carried out by Change Wave Research for RBC Capital reveals that 74 percent of the respondents were still loyal to iPads. However, the price for the iPad has reduced by 3 percent. The table below shows the changes between two periods. Daily Demand Price October 2012 3,000,000 $529 November 2012 2,220,000 $513.13 Change 780,000 $15.87 Price Elasticity of Demand According to the law of demand, changes in price is inversely proportional to the changes in demand. The relationship between change in price and demand is indicated in the concept of elasticity of demand. Price elasticity of demand can be defined as the responsiveness of demand to the changes in price (Wessels 2006, 15). The formula of measuring price elasticity of demand is as shown below. E(p)= Proportionate change in demand/Proportionate change in Price. The price elasticity of demand for the iPad mini is {(2,220,000-3,000,000)/3,000,000}/ {(513.13-529)/529} The price elasticity of demand can be established to be +8.7 Ipad Mini Supply Apple’s new iPad started experiencing supply constraints on its launching day, with the white and silver varieties proving particularly popular at the various Apple stores. This was predicted long before Apple announced the iPad Mini. In the United Kingdom, the 16GB and 64GB models were still available for November demands. However, in the Apple’s flagship store on Fifth Avenue, New York, demand has supposed supply, which has led to starting of pre-order services. Apple Inc announced that it sold 3 million iPad Minis and fourth generation iPads over the last three days after the launching day. The company did not break out how many of the three million iPads were Minis and how many were fourth generation. This clearly indicated that the Minis sold out in various Apple stores. Various analysts examined the few data points provided by Apple Inc and came to the conclusions below. William Power of the Baird Equity Research revealed that most of the people who were waiting in the lines after the launching of the two models of iPads wanted to purchase the Mini. William came to this conclusion despite Apple Inc not revealing iPad Mini sales separately. He also expected Apple Inc to sell all of the produced iPad minis, approximately 6-8 million minis this quarter. Brian White from Topeka Capital also shared the same opinion as William. He also indicated that a greater supply of the Ipad mini would have allowed for greater sales. Thus, the supply in the case of iPad mini is equal to the quantity sold, which is approximately 1-1.5 million in the launching weekend. Gene Muster from Piper Jaffray suggested that out of every 10 iPad customer waiting on the lain to purchase, nine wanted to purchase the iPad mini. Aaron Rakers from Stifel Nicolaus indicted that Apple Inc sold out the iPad Minis, which showed that demand exceeded the initial supply with many of the pre-orders being shipped to customers and some being scheduled for the month of November 2012. The table below shows the quantity supplied changes between October 2012 and November 2012. Supply Price October 2012 1,500,000 $529 November 2012 1,110,000 $513.13 Change $390,000 $15.87 Price Elasticity of Supply According to the law of supply, changes in price are directly proportional to the changes in supply. The relationship between change in price and supply is indicated in the concept of elasticity of supply. Price elasticity of supply can be defined as the ratio at which supply changes to changes in price levels. When due to a small change in price, supply changes to a great extent, supply can be said more elastic (Wessels 2006, 17). When due to a big change in price level supply changes to a little extent, supply will be less elastic. The formula of calculating elasticity of supply is shown below. E(S) = Proportionate change in demand/Proportionate change in Price. The price elasticity of supply for the iPad mini is {(1,110,000-1,500,000)/ 1,500,000/ {(513.13-529)/529} Qualitative Forecast Forecasting is the procedure of giving reports regarding future events whose actual results have not yet been observed. For example, if the sales department of Apple Inc had forecasted demand for the iPad mini, maybe they would have looked for ways to meet the sales demands of their customers. Decision makers use forecasts to make concrete decisions and support the decisions made. For example, Apple Inc can make use of product demand forecasts to make decisions on quantity of production and set the price based on the available information. This forecasting method does not use numbers to make future predictions, but relies on judgment, opinions, and experiences. Qualitative forecasting has the ability of predicting variations in sales variables and consumer behavior based on the knowledge and opinion of senior decision makers and outside experts. This is one of the main advantages of using qualitative forecasting methods. Economic conditions such as inflation also facilitate the reliability of qualitative conditions. Apple needs to make a qualitative forecast of the demand for the iPad Mini in order to come up with the quantity that needs to be produced and supplied to the market. Information availed from the qualitative forecast will enable Apple to avoid over-production of the iPad Mini, leading to tying up of stock in its Apple stock. By establishing the demand, Apple Inc’s decision makers can also avoid under-production, which could lead to low profitability and stock-outs. Economic indicators have been used to come up with the qualitative forecast of demand for iPad Minis. An economic indicator is a statistic concerning the financial system that facilitates the analysis of economic performance and forecasts of upcoming events. One of the many uses of economic indicators is the analysis of economic cycles. Some of the examples of economic indicators include unemployment rate, housing statistics, consumer price index, industrial production, consumer advantage ratio, bankruptcies, stock market index, foreign exchange index, and gross domestic product. Economic indicators can be categorized into three groupings in relation to their natural timing relative to the business cycle. These are leading indicators, lagging indicators, and coincident indicators. The qualitative forecast analysis of demand for the iPad Mini will employ leading indicators. Leading indicators are variables that usually change in response to the economic conditions and predict future trends in the economy. They are therefore most useful for short-term predictions of the economic conditions. Unemployment rate, consumer price index, foreign exchange rates, and gross domestic product are the leading indicators that have been employed to determine the demand, supply, and prices for iPad Minis in the United States of America. Gross domestic product is mainly the most significant gauge of a country’s economy reported in quarterly basis. Gross domestic product should be differentiated from gross national product. Gross Domestic Product includes goods and services produced within the geographical boundaries of a country, not considering the nationality of producer. Gross national product includes the goods and services produced outside the country, but produced by its citizens. GDP is computed without deducting depreciation of fictional assets or reduction and deprivation of natural resources. In the year 2007, the GDP per capita for the United States of America was 46,349. GDP per capita is the gross domestic product divided by the population of a country by midyear. In over the years, the United States GDP increased by 0.89 percent in 2008, reduced by 3.35 percent in 2009, increased by 3.34 percent in 2010, and further increased by 3.73 in 2011. Based on this facts, the economy is expected to grow since there has been growth over the 4 years. The GDP directly affects the purchasing power of individuals within a country. This means that the demand for iPad Minis is expected to rise as the United States’ GDP rises (World Bank 2012, 36). The unemployment rate is another leading economic indicator that can be used to determine demand, supply, and pricing of a product such as the iPad. Unemployment rate is the number of people who do not have a source of income or do not take part in any form of income generating activity, despite their ability to work. Unemployment in an economy reduces the country’s GDP and thus its citizen’s purchasing power. The unemployment rate in the United States has increased over the years reaching 7.9 percent in 2012 October. However, the rate of unemployment had not been adverse to affect the GDP largely. In spite of the rising unemployment rate, the GDP has been rising, indicating that the economy has been growing in the midst of rising unemployment rate. The unemployment rate averaged to 5.8 percent from 1948 to 2012, reaching the highs of 10.8 percent in November of 1982 and lows of 2.5 percent in 1953. The graph below shows the unemployment rate from January 2011 to July 2012. From the graph above, there has been a decline in the rate of unemployment from July 2011 to November 2012. This might be an important lead economic indicator predicting further growth in the economy and increase in the country’s purchasing power. The indicator signifies that the demand of iPad Mini might increase and therefore, the decision makers should consider increasing supply of the product to the market. Consumer price index is also an important leading economic indicator mostly influenced by inflation. The consumer price index is a measure that analyses the weighted average of prices paid by typical consumers for retail goods and other items. Consumer prices indices point to the rate of inflation in a country’s economy. From January 2012 to July 2012, the consumer price index has been diminishing at a steady rate from 2.925 to 1.408 percent. In August, the price index rose to 1.692 percent, 1.991 percent in September, and reached 2.162 percent in October. This may be an indication that the purchasing power is likely to go down. Apple Inc should consider meeting the current demand within a short time since sales are likely to go down in the near future (Trading Economics, 2012). Quantitative Forecast Quantitative forecasting is the statistical method that employs realistic arithmetical and preceding experiences to forecast future events. The techniques used to approximation future events can be categorized as time series and explanatory approaches. Time series procedure utilizes precedent drifts to predict future events, while explanatory techniques endeavor to show connections between two or more variables. Regression analysis, one of the explanatory techniques is used to carry out the qualitative forecasting analysis for the demand, supply, and price of the iPad mini. Regression analysis is an arithmetical procedure used for approximating the relationships among variables. Regression analysis facilitates an individual to comprehend how variables change when any one of the independent variable is altered, while the other independent variables are held constant. Regression analysis can therefore be used to estimate the dependent variable given the independent variable. Linear regression analysis models invole the following variables. The unknown parameters denoted by B The Independent variable denoted by X The dependent variable denoted by Y A regression model relates Y to a function of X and B as shown below. Y = A + BX Month Rate of Unemployment Consumer Price Index January 8.5% 2.925% February 8.3% 2.871% Match 8.3% 2.871% April 8.2% 2.303% May 8.1% 1.704% June 8.2% 1.664% July 8.2% 1.408% August 8.3% 1.692% September 8.1% 1.991% October 7.8% 2.162% ? 82% 21.591 The formula used to calculate regression is as shown below. b1 = n? xy- ? x ? y / n? x2 –(x)2 In regression, the variables that were used are rate of unemployment in United States and consumer price index in the United States. The table below shows variables used in linear regression analysis. X x2 CPI XY 8.5% 72.25 2.925% 24.86 8.3% 68.89 2.871% 23.83 8.3% 68.89 2.871% 23.83 8.2% 67.24 2.303% 18.88 8.1% 65.61 1.704% 13.8 8.2% 67.24 1.664% 13.64 8.2% 67.24 1.408% 11.55 8.3% 68.89 1.692% 14.04 8.1% 65.61 1.991% 16.13 7.8% 60.84 2.162% 16.86 ? 82% 760.81 ? 21.591 177.42 N= 10, ? xy=177.42, ? x = 82, ? y= 21.591 x2 = 760 B= 10* 177.42-(82 * 21.591) / 10 * 760 - 822 1774.2 – 1770.46 / 7600 – 6724 = 0.0043 B= 0.0043 Following the linear formula Y = A + BX, if B is equal to 0.0043 A will be, 21.591 = A + 0.0043 (82) A is equal to 21.24. If a prediction is made that the rate of an employment will go down by 1.3 percent from the previous month probably because of the re-election of the president, the Consumer Price Index will be estimated to be as shown below. Y = 21.24 + 0.0043 (7.2). The consumer price index will be expected to be 21.27 in the month of December. This will be an increase in consumer price index, which means there will be an increase in inflation. Inflation is likely to result to reduction in consumer purchasing power. Consumers are also likely to reduce consumption of luxury products and non-basic needs such as the iPad Mini. These will lead to low sales and profit margins for the Apple Inc. Margin Analysis Margin analysis involves the calculation and determination of the profits that may arise from sales of a particular product or service. In the launching week of the iPad Mini, in the month of October, 1.5 million iPad minis were sold each costing $529. This generated sales of $793.5 million in the launching week only. Ipad sales have been predicted to fall in the month of December due to rise of inflation. The sales are likely to reduce by 21.27 percent. The sales margin for December is therefore likely to be 624.7 million dollars. Conclusion In this thesis, Apple Inc was selected for analysis because of its recent growth and variety of quality products that have a high demand worldwide. Apple Inc produces and distributes over 35 products and services. For this research, Ipads Mini was selected for analysis among the variety of products manufactured by Apple Inc. Apple Inc has produced a variety of Ipad models. The ipad Mini was selected. The supply and demand of the iPad mini is analyzed and future sales forecast has been made. In the launch weekend, the Fifth Avenue Apple Store in New York was able to sell from 1 million to 1.5 million iPad minis. A single iPad Mini sold at around $329 to $529, based on the amount of memory and other specifications. Apple’s new iPad started experiencing supply constraints on its launching day, with the white and silver varieties proving particularly popular at the various Apple stores. This was predicted long before Apple announced the iPad Mini. Qualitative and quantitative techniques have been used to try and address the demand and supply problems that arose in the launching week. Apple needs to make a qualitative and quantitative forecast of the demand for the iPad Mini in order to come up with the quantity that needs to be produced and supplied to the market. Information availed from the qualitative and qualitative forecast will enable Apple to avoid over-production of the iPad Mini, leading to tying up of stock in its Apple stock. By establishing the demand, Apple Inc’s decision makers can also avoid under-production, which could lead to low profitability and stock-outs. The profit margin of the Apple Inc has also been forecasted to decrease due to inflationary reasons. References Savitz E, (2012). Apple: Street Pleased with Early iPad Mini Sale. Forbes. 5 (206), 7-15. Wessels, W. (2006). Economics. New York, NY: ALM Publishing. World Bank, (2012). World Development Indicators 2012. Washington D. C. World Bank Press. Trading Economics. (2012). United States Unemployment Rate. Retrieved from http://www.tradingeconomics.com/united-states/unemployment-rate Read More