Micro analysis Apple Watch Paper
Overview
Apply Inc. which has been listed on NASDAQ is a US firm that specializes in the design and manufacture of a range of content-based services, consumer electronics, and software. The firm’s headquarters are based in California. Apple is one of the world’s biggest institutions in terms of technology. Some of the products that have been produced by the firm entail iTunes media player, Apple Watch and Pad tablets (“About Apple”, 2019). In 2018, the organization announced the highest sales amounting to 265.6 billion dollars. About 218 billion dollars came from the sale of the iPhone. The organization has 132000 full-time workers (“Apple Inc. – Annual Report”, 2018). The organization was established in 1976 as a hardware and computer company. And since it was initiated it transitioned into the creation of other devices. The organization has also established retail stores all over the world to offer buyers the most convenient ways to find commodities. The firm competes with major brands such as Samsung.
Supply, Demand, and Market Equilibrium
Price elasticity is an estimate in economics that measures the responsiveness of a good demanded or supplied to a change in its price (Mankiw, 2014). Elasticity can be described as elastic or inelastic. As for the Apple watch, the conceptualization of elasticity is perceived in regions where the product has been sold. For instance, all Apple products retailed in the US are considered inelastic demand. The reason for this is that all Apple goods are regarded as luxury premium products. Nonetheless, when this prospect is compared to the fact that the US is a first world country, contrasting results are received. The median income in the US is higher compared to a majority of countries making the price for the Apple watch quite affordable for a majority of Americans. Consequently, the price elasticity of demand for the watch in 1st world countries is considered inelastic. On the contrary, the price elasticity of demand for the watch in other countries is considered elastic.
The Apple Watch is a product from Apple which costs the consumers anywhere from $349. The watch is estimated to have a production cost of $83.70 to make. This is about 24% of the retail costs for the watch. It means that the company is making a good margin out of the watch. It is considered as being the lowest costing hardware product for the organization (Saltzman, 2019).
The most expensive input for the watch is the OLED display which is made in Korea. This part of the watch costs about $20.50. The second priciest part of the product is the processor, this is estimated to cost $10.20. The rest of the cost is shared between the other parts including the taptic-engine which is a motor in the phone meant to mimic the feeling of being tapped and this takes most of the watch’s space. There are other costs included in the software and licensing also, and also not to forget the outer shell for the watch (Saltzman, 2019).
There are several factors that could affect the mix of the products that are used to make the watch. One of the factors is the target market. Depending on the target market, Apple could bring in different inputs for the product. In the case of the watch, the organization can decide to have the same watch to have a gold coating in order to target the high-end market. This, of course, means that the cost of this kind of watch would be higher. As mentioned, the price of the watch ranges from $349, it should be noted that this could go up to $17000.
Another factor that could affect the mix of the products is an upgrade for the product. In the case where a first generation is been produced and a second generation needs to come in place, it means that some of the product’s input might need to be changed for the second generation. In such a case the software for the product will in most cases be the main product input to change. The new upgraded software could end up costing more or in some cases lesser than the previously used software. Another factor that could affect the input mix could be the size needed for the product. Where a smaller version of the product is needed, it might be necessary to change the input products, in this case, the taptic-engine engine which takes most of the space for the watch might need to be changed or completely removed (Leeson, R. (2017).
Outside sources indicate that the Apple watch is the best-selling smartwatch on the market today. In a study done in 2015, Juniper research reported that the Apple watch accounted for 52% of smartwatch shipments globally. This statistic is particularly impressive since the watch did not launch until April 2015. Market equilibrium is the state where the demand for a particular business sector is equivalent to the supply (Hamada, 1969). The Apple watch is considered more fashionable to other watches. Most people tend to purchase the watch not because of the technology but because of the fashion appearance and trend. An analysis at Cowen and Co stated that preorders worldwide reached 1 million during their very first weekend of sales. Consequently, its demand was and still is higher than the supply.
Apple is a big company and most of its products share the same software and components. The company can bulk buy these items and end up paying less due to bulk buying. These products will also be coming from the same place and they will be transported together leading to saving on transport costs (Parkin, 2019). The company also is able to enjoy economies of scale through advertising. The company is large and advertising one product in a way advertises other products. This way, the costs of advertising are generally lower as compared to a smaller firm. The organization can use the advantage of economies of scale to lower the prices for its products where a new competitor enters the market. By lowering its prices, this will attract customers to its products rather than the products of the new competitor (Parkin, 2019).
Production and Costs
Inputs and costs
The production costs for Apple watch can either be categorized as fixed or variable costs. Fixed costs do not change and are the same despite the level of production. Fixed costs could, therefore, include the amount spent on leasing office space for the period of watch development, research and development expenses, and marketing costs (Kolmar, 2017). The variable costs include the cost of various components which are in most cases the cost drivers and dependent on the number of productions. Such variable costs include costs for the acquisition of diagonal, plastic OLED used to manufacture watch displays or touch screen controllers.
The second variable cost item includes Apps Processors necessary for the development of Memory and other IC content. The third critical component of the variable costs of manufacturing Apple watch consists of the BT/WLAN which is necessary for the control or power management. The company incurs other variable costs during the acquisition of sensors, battery packs, and box contents. The display and touch screen consists of the most expensive single variable cost of producing a watch. The watch is estimated to have a total production cost estimated at $83.70 per watch which include both fixed and variable costs. The price is about 24% of the retail price of the watch in the market.
Analysis of the factors
Several factors impact the choice of inputs selected to produce Apple Watch products. One of such elements is the availability of cheap labor and raw materials. The current combination of production components or raw materials is meant to ensure that the product development cost remains low to increase the profitability margin. An increase in prices of given raw materials is likely to force the company to shift to other suppliers and consequently, affect the quality of Apple Watch products (Hsiao, & Chen, 2018). The change in prices of raw materials is also likely to result in the company establishing new target markets. The company may also require additional expensive raw materials in an attempt to upgrade the existing products to meet current market quality demands. In cases where such materials are expensive, the company would have to increase the prices of Apple Watch in the market. The company could also make a significant decision to shift its operations to other countries or regions due to an increase in labor costs. The production goals for the company are to produce quality products and the minimum possible costs.
Production decisions
The company should install a complex manufacturing technology to create a valuable product that is beautiful to look and one that reduces overall production costs from the current cost of $83.70. The apple watch production segment should enhance ultra-compact product and packaging designs that improve material efficiency. The material efficiency can significantly reduce the overall raw material costs and thus the variable costs. Material efficiency can also reduce energy consumption levels, particularly during the production stage. Apple Company should continue to use steel, aluminum, and gold case materials that are highly recyclable.
The current price is about 24% of the retail price of the watch in the market, and the company can adjust its pricing strategy for its watch from $349 to allow for an average selling price that exceeds $600 and reduce the manufacturing costs to obtain higher gross profit margins. The company can continue to achieve economies of scale through comprehensive sales and marketing activities. The Apple Watch segment can increase its allocation of marketing expenditures (Alexander, 2016). Apple Company enjoys a significant market share, and its marketing practices for one product plays a critical role in the marketing of others. As such, marketing costs are in most cases lower for big companies as compared to newly firms. The economies of scale currently enjoyed by Apple watch segment can also assist to sell at reasonably lower prices as compared to other competitors and maintain a significant profit margin.
The company can also consider lowering of product selling prices as this will catch the attention of clients towards the company’s products as compared to those of new competitor. Since the company employs more sophisticated technology in the development of watches, it is critical that it collaborates with suppliers to enhance capacity to satisfy the client needs (Dempsey, 2015). Apple is a multinational corporation, and the production process of its various products utilize similar or related technology. Apple Company can buy the critical inputs in bulk and end up paying less due to economies of scale. These products will also be coming from the same regions, and they will be using the same unit of transportation thus allowing the company to cut on transportation costs. As earlier noted, the company’s most highly-priced input for the watch is the OLED display and is manufactured in Korea. The critical component of the watch can cost an estimated $20.50 while second highly-priced components of the product are the processors which are estimated to cost $10.20. The company should consider the establishment of production departments to be located closer to such regions in an attempt to reduce the overall production costs.
Market Structure
Apple operates in an oligopolistic market structure. Oligopoly is a market structure with a limited number of sellers. In the market, there is a tension between the self-interest of the Corporation. If all institutions limit their output they can charge higher prices for the commodities they offer. The companies in the oligopoly market stricture also offer identical and similar commodities and, in most cases, they compete in terms of prices (Lamantia & Radi, 2018). The market is considered to be oligopolistic because of the few but large competitors in the market offering products that are identical. Apple has managed to maintain its leading position because technological barriers prevent other institutions from joining the market. The company also possess a large consumer base of loyal customers which makes it extremely hard for other institutions to get consumers to switch to their brands. Most consumers who purchase Apple goods are unlikely to switch to other brands because of the trust; this makes it extremely harder for other firms to garner attention. Apple has managed to tie all the commodities it offers through applications such as iCloud or iTunes; this makes a greater incentive for individuals to purchase more.
Apple is a multibillion-dollar institution which makes it easier to source for cheap raw material from any part of the world. The organization purchases all the material on wholesale and this gives it an opportunity to set the price of finished goods on wholesale. The participants of the oligopolistic market can set their own prices without considering other firms. Apple is capable of charging a high price for most products such as the iPhone a factor that has contributed to the rise in profits.
The sellers in the industry offer identical commodities such as mobile phones and laptops yet there are none that completely identical to the other. Advertisement plays a crucial role in the market. The aggressive market techniques that are employed by various firms are meant to catch the attention of the buyers (Bogdanoff, 2018). Apple major competitors are the companies that manufacture gadgets such as mobile phones and tablets, mainly those with a diverse price range of commodities available. The closest competitor is HP, Lenovo, and Samsung. The market for Apple commodities is not concentrated. The market power does not rely on a single player. There are numerous firms and none has the regulating power.
Market Structure Impacts Your Chosen Company’s Financial Position
Apple’s revenue has to increase consistently in the past three years. In 2018, the sales increased by 16% to 265.6 billion dollars, this was about 36 billion dollars more than the previous year. The sales of service increased by 24%, the iPhone rose by 18% and other commodities that the institution provides also drove the revenue higher by 35%. However, Mac and iPad posted a decline of 1% and 2% respectively in the year 2018 from 2017 (“Apple Inc. – Annual Report”, 2018).
The company was in a position to increase the revenue of the iPhone by charging a higher price which is a scenario in the oligopolistic market. The firm sold 966000 units of iPhones in 2018 more than it did in 2017. Apple Inc. credited higher licensing revenue and App store for gains in the Service section. The revenue rose in the geographical region matched with general growth. The oligopolistic market enables Apple to charge a premium price over the last three years a factor that is showed by the increasing sales.
How the Possible Changes in Industries Market Structure Impact Apple
Apple employs two marketing techniques: come up with the world’s changing commodities and to improve the popularity of the iPhone. The company has continued to release newer commodities that meet customer needs (Shakhtarіn & Nosyriev, 2018). In 2018, the institution released the iPhone XS Max. The company stated that it would no longer disclose the number of tablets, computers, and iPhone sold but rather it would rely on the revenue figures to convey performance. The company also uses the acquisition technique to expand the market. In 2018, it acquired Shazam (this is a music identification app for smartphones). The strategies will see the firm continue to dominate the market.
References
About Apple. (2019). Retrieved from https://www.apple.com/
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Apple Inc. – Annual Report. (2018). Retrieved from http://www.annualreports.com/Click/20362
Apple Watch Claims Over 50% of 2015 Smartwatch Market. (2015). Retrieved from https://www.juniperresearch.com/press/press-releases/apple-watch-claims-over-50-of-2015-smartwatch
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