In 2010, in reaction to rumors of a 7-inch tablets being introduced into the market, Steve Jobs simply said, “7-inch tablets are tweeners: too big to compete with a Smartphone and too small to compete with the iPad” (Chen, 2010). While Apple has stayed true to this, many tablet manufacturers have introduced tablets smaller than the iPad, and they are having success. Samsung has introduced the Galaxy Tab, which is generally just 7 inches, although it also comes in a 10.1 inch version. flouting into a market with so many sellers is easy, but success is not guaranteed. One must look at the firm considered to offer the most competition, demand and supply, and both the issues and the opportunities that will be faced. If all factors are carefully considered, all possible outcomes explored – success can be achieved.
The strategic planning group has determined that Samsung is the closest competing organization. In business for over 70 years, Samsung has become a global leader in high-tech electronics manufacturing. Founded March 1, 1938 by Byung-Chull Lee in Taegu, Korea, Samsung started by exporting “dried Korean fish, vegetables, and fruit”. Samsung broke into the electronics field in 1970 with the production of its first black-and-white television, which were sold domestically in 1972. In 1974, Samsung began the washing machine and refrigerator production for which it is still well known. Mass production of the microwave oven began in 1979, followed by air conditioners in 1980 and VCRs in 1984.
Over the years, Samsung has also won many awards, including five European EISA Awards. In 2010, Samsung brought the Galaxy Tab to the United States market. While not the first contender against Apple’s iPad, the Galaxy tablet might be the most serious contender. The Galaxy Tab ranges from 7 inches to 10.1 inches and is built on the Android platform. There are three sizes available in wifi only versions and five available with both wifi and 3G capabilities. The latter can be used on the networks of the five major cellular service providers, which enables usage on the go as opposed to usage just while connected to a wifi hotspot.
Demand, Supply, and Equilibrium
The tablet industry is one that is becoming more popular every year. Apple’s iPad is one tablet that is well desired by most consumers. The demand for tablets is increasing every year as excitement builds more over them. One factor that affects demand is consumers are choosing tablets over notebooks. Tim Cook, Apple’s chief operating officer indicated that “we believe some customers chose an iPad instead of a Mac but even more chose an iPad over a Windows PC” (Merritt, 2011). Competitor’s offerings also affect demand. Amazon and their introducing of the Kindle Fire that is an e-reader and tablet all-in-one has affected iPad’s demand. Many people have steered away from iPad and bought the lesser feature packed Kindle Fire. The Kindle Fire is significantly cheaper though, which is more appealing to some consumers. “Piper Jaffray analyst Gene Munster polled 410 consumers and found that 62 percent of those consumers said they would purchase a $249 tablet over the average, $599 iPad sold” (Amazon Kindle Fire Tablet at $199 Challenges iPad, 2011).
Having a successful offering, such as the Apple iPad could induce supply issues as Apple has encountered. In the case of Apple’s issues, an earthquake in Asia shut production down for a period of time. Another factor with supply is having funds to secure parts that are vulnerable to shortages. Managing the supply chains enables large companies like Apple to secure these key components and not endear supply disaster. “Apple with continue to enjoy operational efficiency through upfront cash payments offered to its suppliers as strategic weapons to secure a significant advantage over its rivals” (Trefis, 2012). For a new company starting out in a market with big contenders, it is crucial to achieve market equilibrium. One point to ensure is the supply of the new tablets will meet the demand of the introductory device. Essentially executives must predict the demand of the new tablet. If this prediction is skewed could place the company at a supply disadvantage and could take months to overcome this difference.
If the supply decreases or unchanged with a high demand could lead to a higher equilibrium price. Competitors in this market include the Apple iPad, Motorola Xoom, Amazon Kindle Fire, Samsung Galaxy Tab (10.1 inch), ASUS Transformer, and the Blackberry Playbook. Potential customers include the person that wants an alternative to a laptop or desktop PC. However, in many applications, the tablet is an extension of the laptop or desktop PC. Photographers, videographers, college students, sales agents, and executives are potential customers as the tablet allows the person access to files and folder that pertain to their field of work or studies. With the invention of cloud computing, any document can be viewed anywhere an internet connection can be received.
Competitiveness and Long-term Profitability
Most markets are highly competitive, even if there are only a few organizations offering the product – the competition is for both initial and repeat sales. And of course, all organizations want their “slice of the pie”. With new adventures, however, come large risks. A successful company knows beforehand any issues that might arise so as to best plan how to deal with them. Likewise, a company should be able to recognize opportunities when they arise in order to take advantage of them.
Price Elasticity of Demand
According to an article appearing on Bloomberg.com, the marginal cost of manufacturing the 16-gigabyte Apple iPad is around $260. This includes $95 for the touch-screen display and $26.80 for the device’s processor. Flash memory accounts “… for $29.50 in costs on the 16-gigabyte model, $59 in the 32-gigabyte version and $118 in the 64-gigabyte model. The differences in flash memory costs “ The cost of manufacturing the 32-gigabyte version of the iPad, which sells for $599, to $289.10. They boost the cost of the 64-gigabyte version, which sells for $699, to $348.10 . Obviously, Apple has very healthy profit margins on these devices; roughly 48% for the 16-gigabyte iPad, 52% for the 32-gigabyte iPad, and 50% for the 64-gigabyte iPad. From this information, we can also infer the price elasticity of demand for these products. Price elasticity is a measure of the percentage change in quantity demanded associated with a one percent change in price.
From basic price theory, we know that marginal revenue MR = P(1 + 1/, where P is price and corresponds to the price elasticity of demand. We also know that the optimal output decision for a profit maximizing firm involves setting quantity such that marginal revenue is equal to marginal cost, MR = MC. Thurs, we can rewrite the marginal revenue equation in the following manner: MC = P(1 + 1/—> MC = P + P(1/ therefore, (MC – P)/P = (1/—> = P/(MC – P) Applying this equation to the various iPad models that are currently for sale, we find that 1. the price elasticity of demand for the 16-gigabyte iPad is = P/(MC – P) = 499/(260-499) = -2.09;
2. the price elasticity of demand for the 32-gigabyte iPad is = P/(MC – P) = 599/(289-599) = -1.93; and
3. the price elasticity of demand for the 64-gigabyte iPad is = P/(MC – P) = 699/(348-699) = -1.99;
Any number less than -1 for indicates that demand is relatively elastic. This implies that if Apple were to change prices from current levels, then the percentage change in quantity demanded would exceed the percentage change in price. In other words, if Apple dropped prices, revenue would increase because of a larger quantity response, and if Apple raised prices from current levels, then revenue would decrease due to a disproportionate decline in quantity demanded.
The iPad was incredibly popular among consumers, selling around 15 million units within the first year. In March 2011, Apple unveiled the second generation iPad, which is 33 percent thinner, contains two cameras and runs on a dual core processor. The third generation, which is faster has a better camera and dictation, was announced March 7. (Garvin, 2010) One of the most fascinating things from an economic point of view happened during this most recent recession: Apple posted quarter-after-quarter growth and record-setting revenue numbers. When it comes to the U.S. economy, Apple has been of the few bright spots lately, which has provided hope for many. During this past recession, as well as the one that happened after the dotcom boom, Apple didn’t sit still. The company innovated through both, launching two new categories of products that came directly as a result of research and development spending. Those products were the iPod and the iPad. The law of diminishing marginal productivity states that as more and more of a variable input are added to an existing fixed input, eventually the additional output one gets from that additional input is going to fall.
Also, increasing one input, keeping all others constant, will lead to smaller and smaller gains in output (Colander, 2010). Being the firm that is going to be introducing a new tablet into the marketplace we need to be focused on producing where both average product and marginal product are positive and falling. Cost structure is the expenses that a firm must take into account when manufacturing a product. A true cost structure includes all costs from the beginning, such as production, labor, marketing, warehousing, sales and marketing, and shipping. The cost structure of the firm is the ratio of fixed costs to variable costs. Some examples of fixed costs would be the manufacturing and direct labor overhead costs. Variable costs would be direct materials, commissions, production supplies. Tablets are made up of several parts that come from several suppliers. There is the memory, hard drives, the touch screens, a lot of them are coming with cameras now.
The cost of buying all these parts to build the tablet need to be kept as minimal as possible in order for the company to be profitable and competitive once the tablet is introduced into the market. Variable costs are the costs that change by the determining factor of business activity. Examples of variable costs for the tablet are the cost of labor, overhead and supplies. These costs are driven primarily by the productivity of the manufacturing of the tablet. Once the productivity for the tablet changes, the total variable cost will also change. Factors that can change variable cost for manufacturing tablets are inflation, supply, and demand. Inflation can change the cost of supplies creating a higher amount to overall production of the product. The amounts can change variable cost by increasing or decreasing the cost to produce the tablet. As inflation is present the cost of raw materials to manufacture product will increase.
Thus creating a increase in supply cost. Changes in supply and demand effects labor cost. When supply is low the need to increase labor hours exists to meet demand of product. When supply is high and demand is low the labor hours decrease to create minimal additional cost. Supply and demand are main factors in which changes productivity for the company. Productivity is reflected based on demand of the tablet. When demand is high the company has to increase labor cost to increase productivity of manufacturing of the product, thus creating a change in the company’s variable cost. Overhead cost is a variable cost that changes with productivity. Increase occurs in operations to manufacture product as productivity increases and decrease. Fixed cost is the cost that does not change by production or sales activity.
Fixed cost can be rent, salaries, loan payments, taxes, and insurance. These cost rarely change and can be easy identifiable by determining what cost would still need to be paid with no sales activity. Factors that can change fixed cost is when the company expands, changes in law, and new contractual agreements. The changes will determine the new fixed cost for the business. As the tablet company continues to grow the need for additional manufacturing plants and employees will increase fixed cost. The expansion will create a need for additional insurance and the property taxes will increase. The company will change fixed cost if new assets are acquired by long or short term debt. The organization can maximize their profit-making potential by offering better service warranties and customer service compared to the competition. These are items that do not necessarily increase the costs as the product should be able to last the duration of the warranty through the use of quality parts. The same concept can be applied to the customer service quality.
Enhanced customer service would not require additional employees, but would merely require the company to raise their expectations of their customer service employees. These two features would provide our customers with unforgettable service which in turn will generate free promotion of our product and services. Word of mouth would travels from state to state or country to country and provides our company an edge over our competition without us negatively impacting our bottom line. The revenue would increase as we would offer our customers a quality product with peace of mind. These new feature would allow us to offer a complete package. As the value of these features will put us above the rest in time, we would be able to increase the price of these services.
This would the marketing team to fully assess the value and customer satisfaction. Another recommendation would be to create models that would allow consumers to personalize their tablets. Our company can offer the tablets in different colors or cases with graphics. These additional features would increase our marginal costs. However, if this tactic is successful, the demand of the product would increase as well as the price for each customized unit. The increase in cost would be minimal compared the increase in revenue as these colors and graphics would be unique to our brand. It would also be in our best interest to manufacture just a small quantity in order to drive up demand.
This will also guard the company if we are not successful with our strategy. The strategic planning group feels that it is well prepared for introducing a new tablet to the market. The group members have taken a look at their closest competitor, Samsung, as well as other organizations offering the same product. They have taken into consideration the fixed and variable costs, supply and demand, market equilibrium, the technological innovation required, and the cost structure required. One member was able to point out issues that might need to be overcome and opportunities too good to miss. Another made profit maximizing recommendations. Based upon the research results, the strategic planning group is going forward with the tablet project.
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