Executive Summary
Regardless of the industry in which a firm operates, its functions are subject to internal and external forces, which influence its growth and profits. Likewise, multiple forces that exist in the market play a vital role in shaping Apple’s growth and sustainability of profits. An economic analysis of Apple shows that market entry forces, including high entry costs for new market entrants, high switching costs among consumers, internal economies of scale, good reputation, and government restraints, have a significant positive influence on the creation of profits in the organization. The power of suppliers, in the form of high concentration of suppliers, lower prices of alternative inputs, and relationship-specific investments, also facilitates the creation and sustainability of profits in the company. The concentration of buyers in the technology industry is high; hence, it reduces profitability in the company. The low-cost structure associated with the corporation’s rival products and services lowers its chances of increasing its profits. In addition, the technology industry is highly competitive; thus, the majority of the firms indulge in price wars posing a challenge to Apple’s attempts to increase prices and boost profits. Finally, the analysis reveals that while the pricing of the company’s substitutes adversely affects its profitability, the existence of complementary commodities in Apple’s portfolio acts as a major source of growth and profitability.
Apple
Introduction
Apple ranks among the top technology companies in the world. The corporation’s top position in the industry is facilitated by its unique technological capabilities, which distinguishes it from other firms operating in the sector. Through its improved technological functions, Apple develops and sells several consumer electronics, hardware and software, such as iPhone smartphones, computer tablets, portable media players, and watches, which are the company’s major source of revenue and profits (“United States Securities,” 2018). Despite its competitiveness in the market, Apple’s operations are subject to several economic forces, including market entry costs, power of input suppliers, power of buyers, industrial rivalry and existence of substitutes and complementary goods, which consequently shape its growth and sustainability of profits.
Market Entry
One of the economic forces that influences Apple’s growth and sustainability of profits is the nature of market entry costs. Unlike other sectors that require minimal capital, the technology industry is associated with high entry costs of securing mechanical components, labor, and catering for costs of intermediate goods necessary for production. The high entry costs act as potential barriers for new market entrants; thus, making Apple a dominant company in the industry. Amidst limited market entry, Apple has had the opportunity to gain a larger market share in most countries where it sells its products, hence boosting its profits.
Switching costs is also another factor that influences Apple’s growth and profits. According to scholars, switching costs is any form of cost that arises when a consumer moves from one product to another (Bhattacharya, 2013). Switching costs can take the form of financial or loss in value. Arguably, high switching costs may discourage a consumer from purchasing products from other manufacturers. Put into perspective, Apple offers a unique value proposition, including providing reliable technological devices in the market. The perceived loss of value associated with substituting Apple products is among the factors that prevent individuals from switching to other manufacturers and demanding more Apple commodities. In turn, increased demand leads to higher sales and the generation of more profits in the company.
In addition to switching and market entry costs, Apple’s economies of scale also facilitate the creation and sustainability of high profits. Economies of scale refer to “potential reduction of average cost associated with higher levels of productivity, which is measured by the quantity of output that can be produced in the time” (Celli, 2013, p. 255). Apple mainly specializes in the development of consumer electronics, whose internal components are sourced externally from multiple or single sources (“United States Securities,” 2018). Given that several components are required in the production process, Apple purchases the products in bulk, thus, enjoying higher discounts compared to instances where purchases are made in smaller units. In fact, in its 2018 annual report, the company’s management acknowledged that Apple enters into agreements for the supply of many components (“United States Securities,” 2018). The wide range of products that the company develops, including software, hardware and digital components, is also a source of economies of scale. By diversifying its portfolio, Apple is able to spread risks over its several products. Such economies of scale enable the firm to lower its production costs and diversify its risk; thus, increasing its profits yearly.
Apple’s brand reputation in the market is also a critical factor that influences the creation and sustainability of profits. As research shows, there exists a significant correlation between corporate reputation and economic performance (Blajer-Golebiewska, 2014). Arguably, firms that indulge in sustainable practices are more likely to attract customers, hence boost their economic performance through increased sales. In addition, corporations that indulge in the corporate social acts are believed to be noticeable among investors in the stock exchange, which increases their chances of selling more shares to finance investments (Blajer-Golebiewska, 2014). Apple’s outstanding reputation in the market, through its participation in environmentally sustainable practices, facilitates its economic performances. Notably, Apple is gaining popularity for its effort to reduce over-exploitation of economies by recycling raw materials used in the production process. For example, in fulfillment of its low impact initiative, Apple recycles some major components such as aluminum used in enclosures of its products, including MacBook Air and Mac Mini, with the aim of minimizing the impact of its activities on the immediate environment (“Truly Innovative,” n.d). The company’s involvement in sustainable practices enhances its reputation in the market, creates a higher demand for its products among environmental conscious customers, which translates to higher revenue and profits in the long run.
Government restraints are among the active economic forces that influence the growth and sustainability of profits in Apple. As a company that operates in several countries, Apple’s production functions are subject to diverse macroeconomic factors, including government regulation. Currently, most of the administrators play a protectionist role in their economy by introducing tariffs to either lower imports or facilitate a balance of trade (Namini, 2015). Given that Apple sells some of its products locally and exports the rest, it is evident that its operations are subject to government restraints, which may adversely affect its profits. For instance, in countries where governments impose high tariffs on imports, Apple products tend to be relatively expensive, lowering their demand among consumers. However, to avoid such adverse macroeconomics, Apple has been mitigating the effects of high tariffs by collaborating with host companies in the development of some of its products. Generally, government restraints, through high tariffs, can limit the entry of Apple products in a country, thus lowering profits that may have otherwise been generated in a free economy.
Power of Input Suppliers
Among other factors that influence the sustainability of profits in Apple is the power of the suppliers, which may be pillared against their concentration in the market. Studies show that suppliers derive massive power from their concentration in the industry relative to the market they serve (Mel, Katuse & Namada, 2016). In particular, in instances where the number of suppliers is lower than buyers, the former becomes the price determinant. As noted by Mel et al. (2016), the ability of suppliers to set prices in the market may significantly lower profits among firms because buyers have lower bargaining power. Apple operates in an industry where suppliers are highly concentrated. This is evident from the 2018 annual report, which showed that most components used by the company are obtained from multiple sources (“United States Securities,” 2018). Therefore, it may be argued that Apple has a high bargaining power for its purchases, which translates to increased profits. However, the management acknowledges that despite the high number of suppliers, the prices of its sourced components can significantly increase due to shortages of supplies (“United States Securities,” 2018). In such instances, the firm may incur higher production costs and charge high prices for its products, which can lead to lower demand among consumers and reduced profits. Therefore, where the supply of goods remains constant, the high concentration of suppliers in the market can satisfy Apple’s demand for industrial components at a lower price, reduce its production costs, and enhance the creation and sustenance of profits.
Furthermore, the existence of alternative inputs with varying costs in the global market influences the sustainability of profits in Apple. As studies show, outsourcing has become an efficient way of doing business whereby firms can obtain goods from international suppliers by entering into a contract; a practice that leverages production enhances economies of scale and lowers production costs (Iqbal & Dad, 2013). In an instance where prices of essential design components required in the production of consumer electronics are high among local suppliers, ventures can source for the products from alternative global suppliers with favorable bids. Similarly, Apple operates in a market where global sourcing for its production components is a feasible practice. As outlined in the company’s annual report, Apple’s hardware products are often manufactured by outsourcing partners in Asia, the United States, and Ireland (“United States Securities,” 2018). The availability of alternative inputs in the global market significantly affects the company’s profits by reducing supplier’s bargaining power and allowing the management to select suppliers that offer quality products at minimum prices to lower its production costs and maximize revenue creation.
Relationship-specific investment and supplier switching costs also have the potential to influence the sustainability of profits in Apple. Researchers aver that relationship-specific investments consist of “all investments a party make in a partner that would have limited value outside the focal relationship” (Vazques-Casielles & Iglesias, 2017, p. 1247). For instance, to facilitate the constant supply of production components, a company may invest financially in its supplier’s research and development (R&D). Such an investment-specific relationship would guarantee not only a venture of a steady supply of quality products but also lower prices for purchases made under the contract. Hence, to retain its unique capabilities in the technology industry, Apple’s management indulges in similar practices by financing hardware and software suppliers on a contractual basis. By doing so, Apple mitigates risks of increased prices, which can adversely affect the company’s profits. In addition, supplier switching costs are also closely linked to the company’s sustainability of profits. For example, by sourcing components from other suppliers, Apple may be exposed to multiple risks associated with switching suppliers such as changes in quality and quantity of goods. Consequently, low-quality components can compromise the value of its electronics, lead to reduced demand for the products in the market, and eventually lower the company’s profits. Therefore, relationship-specific investments and supplier switching costs have the potential to decrease or increase Apple’s profits.
Power of Buyers
The concentration of buyers in the market also significantly influences the growth and sustainability of profits in Apple. Studies show that the presence of composition and a number of powerful buyers reduces profit potential within an industry (Kaunyangi, 2014). As the number of potential buyers in a given market increases, they develop a higher bargaining power and can easily influence the prices of commodities set by manufacturers. In addition, Kaunyangi (2014), observes that a high concentration of buyers increases competition among firms, forcing them to lower their prices to remain attractive among consumers. In Apple’s context, the company serves a wide range of consumers from small and mid-sized businesses, education, enterprises, and government markets (“United States Securities,” 2018). While a high concentration of customers characterizes the technology industry, Apple’s unique innovations appear to target a specific class of consumers, most of whom focus on value over price. As such, the demand remains inelastic regardless of the changes in the market prices. Therefore, the composition and limited segmentation of Apple’s market lowers the buyers’ bargaining power, allowing Apple to set independent prices and boost its annual profits.
Price to value the structure of rival products and services is also a factor that affects Apple’s ability to create and successfully retain profits. In business, a price to value structure entails setting the price of a commodity-based on the perception of the benefits that the product offers to a consumer (Toni et al., 2017). This is one of the pricing strategies that Apple uses for its products by guaranteeing increased value for high prices. However, as noted by the company’s management, the firm’s rival products are priced over very low-cost structures, thus posing a threat to its operating results (“United States Securities,” 2018). Arguably, in instances where the demand for a product is sensitive to price changes, as is the case of elastic demand, buyers may shift to cheaper commodities that offer the same value. Besides, the perceived low costs associated with switching from Apple’s products to alternative commodities influence the consumer’s decision to purchase goods from other manufacturers. Therefore, competitive price to value structure of rival products and services affects Apple’s growth and profitability because the demand for its commodities reduces, leading to lower sales and reduced gross margins.
Industry Rivalry
Industrial rivalry is also a critical force that affects Apple’s growth and sustainable profits. Porter’s five forces model suggests that if industrial competition is not strong, ventures can raise commodity prices and thus earn higher profits (Pervan, Curak & Kramaric, 2017). However, if the opposite scenario exists, where industrial rivalry is weak, ventures that raise prices can become less attractive among consumers and experience lower profits due to reduced demand and sales. Likewise, Apple operates in the technological sector, which is a highly competitive environment. Due to the intense competition that exists in the market, firms indulge in destructive price wars, such as adopting low-cost structures in order to attract a more extensive customer base and increase their market share. However, to counter the stiff competition, Apple focuses more on product differentiation, whereby it introduces new innovative products and services to make its commodities more attractive in each market (“United States Securities,” 2018). Based on the above information, it is evident that the existence of industrial rivalry threatens Apples’ ability to adjust prices accordingly in order to increase its profits.
Substitutes and Complements
In addition to market entry, the power of input suppliers and buyers, industry rivalry, and substitutes and complements are also among the forces that greatly influence Apple’s growth and sustainability. Among the products that Apple designs and develops have close substitutes in the market. For instance, Lenovo and Samsung rank among the top corporations that develop consumer electronics, such as laptops and smartphones. In addition, some of Apple’s close substitutes are priced relatively lower, making them more attractive to markets characterized by elastic demand. Therefore, Apple’s attempt to raise prices with the aim of increasing profits can lead to a higher demand for substitute goods among cost-conscious consumers.
The pricing and interdependence of complementary goods also affect Apple’s profits generated from some of its product portfolio. In microeconomics, where two commodities are complementary, their demand and prices vary inversely. For instance, if two Apple products complement each other, say a laptop and a mouse, the need for one component leads to demand for the other. In such scenarios, increased demand for the focal product (laptop) can lead to higher prices for the commodity and subsequently affect the demand and pricing of the mouse. Likewise, the degree of interdependence between Apple products assists the company in increasing the prices for certain commodities, thus allowing the firm to earn higher profits.
Conclusion
As the above analysis shows, market forces significantly affect Apple’s growth and sustainability of profits. The high costs associated with penetrating the technology industry limit new entrants, thus equipping Apple with the capability of attaining a higher market share, increased sales, and high profits. The perceived switching costs of purchasing from other manufacturers of consumer electronics also facilitate sales in Apple and boost its profits. The analysis also shows that reduced power of suppliers due to their high concentration in the market, lower prices of alternative inputs, and relationship-specific investments enhance Apple’s bargaining power for lower production costs, which in turn augments its ability to create and boost its profits. A high concentration of buyers in the industry also challenges the company’s competitiveness, thus lowering its chances of increasing prices to facilitate its growth and profits. The low-cost structure associated with Apple’s rival products and services lowers its chances of increasing its profits. Furthermore, rival companies in the technology sector indulge in price wars posing a challenge to Apple’s attempts to increase prices and boost its profits. The analysis also shows that the pricing of Apple’s substitutes adversely affects its profitability, while that of complementary commodities fosters price increase and higher profits.
References
“Truly innovative products leave their mark on the world instead of the planet” (n.d). Apple. Retrieved from https://www.apple.com/environment/
“United States securities and exchange commission” (2018, September 29). Annual Reports. Retrieved from http://www.annualreports.com/HostedData/AnnualReports/PDF/NASDAQ_AAPL_2018.pdf
Bhattacharya, A. (2013). Switching costs and sustained competitive advantage. International Journal of Business and Management Invention, 2(9), 101-111.
Blajer-Gołębiewska, A. (2014). Corporate reputation and economic performance: The evidence from Poland. Economics and Sociology, 7(3), 194-207.
Celli, M. (2013). Determinants of economies of scale in large businesses- A survey of UE listed firms. American Journal of Industrial and Business Management, 3(1), 255-261.
Iqbal, Z., & Dad, A. (2013). Outsourcing: A review of trends, winners & losers and future directions. International Journal of Business and Social Science, 4(8), 91-107.
Kaunyangi, T. (2014). The impact of competition on performance of firms in the mobile telecommunication sector in Kenya. International Journal of Scientific and Research Publications, 4(11), 1-7.
Mel, B., Katuse, P., & Namada, J. (2016). Extent of suppliers bargaining power relative to performance of oil industry in South Sudan. International Journal of Innovative Research & Development, 5(7), 372-377.
Namini, S. (2015). Adam Smith and government intervention in the economy. Research, 1(1), 1-9.
Pervan, M., Curak, M., & Kramaric, T. (2017). The influence of industry characteristics and dynamic capabilities on firms’ profitability. International Journal of Financial Studies, 6(4), 1-19.
Toni, D., Milan, G., Saciloto, E., & Larentis, F. (2017). Pricing strategies and levels and their impact on corporate profitability. Marketing, 52(2), 120-133.
Vazquez-Casielles, R., & Iglesias, V. (2017). Manufacturer-distributor relationships: Role of relationship-specific investment and dependence types. Journal of Business & Industrial Marketing, 32(8), 1245-1260.
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