Managerial Economics and Strategic Analysis Essay

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Managerial Economics

The company that I am going to write about is Apple, Inc., which designs and markets personal electronics devices, software and accessories. Apple is known for its strategic control systems, both in terms of behavior control and information control. Chapter 9 notes that there are two different approaches to informational control, the traditional approach and the contemporary approach. The traditional approach compares performance against standards while the contemporary approach requires continuous monitoring of the internal and external environments and then adjustments to strategy where needed (Chapter 9). Chenhall (2003) notes that firms often weigh the environment, the industry, the technology and the size and structure of the firm when considering which strategic control systems they want to implement. In the case of Apple, these factors have led it to an informational control system that can reasonably be classified as contemporary. The company's industry is characterized by short product life cycles and rapid pace of technological change. Further, Apple seeks to be ahead of the curve on new product development, and this requires constant environmental scanning. The company may still use performance measures, but its approach is more flexible, proactive and geared towards rapid changes, placing it squarely in the contemporary approach to information control.

Behavioral control includes concepts like organizational culture, rewards and boundaries. At Apple, there is a fairly strong system of behavioral control. For example, the company rewards its worker with equity, with discounts and other perks, in addition to healthy salaries. There was a recent shift towards increasing the weight of equity in executive compensation (Satariano, 2013). This move orients the executive team towards behaviors that are more in line with the interests of the shareholders, something that was a concern to the shareholders as the stock price was falling, never mind that the run-up was largely speculative and irrational. Such a system orients the company towards growth, a challenge given the maturity of the products. Interestingly, this rewards system orients behavior away from using the company's cash stockpile to pay dividends, but rather to use that cash for share buybacks, again highlighting the ability of rewards systems to guide and constraint managerial behavior. Further, Apple has a corporate culture that promotes growth and innovation. With this reward system in place, it encourages management to maintain that culture when there might have been some temptation to fall into a more comfortable culture where the company enjoyed its cash cow products and rested on past laurels. Thus, the successful Apple culture is supported by the rewards system, whereas perhaps the previous rewards system encouraged a shift in corporate culture that would have been detrimental to shareholders.

Another aspect of managerial economics is organizational structure. Chapter 10 outlines that there are four main types of organizational structure, being simple, functional, divisional and matrix. Apple utilizes the functional structure. The company is too large for a simple structure, and tends to break out roles by function. This avoids having product development compartmentalized, something that would run counter to Apple's objective of creating a suite of products that interface seamlessly with each other. People within the company are organized along functional lines, but may work on multiple products. Teams are usually cross-functional in nature and most workers are specialists in their fields, rather than being able to work on different functions within the same unit. The need for the company to have products that work well with each other in a suite demands that a functional organizational structure is used for product development.

Beyond product development, there are some functional divisions that are used. The functions include marketing and retail, as Apple operates a number of retail outlets for its products. The company outsources some entire functions, including production and logistics, and retains only those functions in which it wants to specialize. The functional structure in this case simply supports the idea that the company's functions are somewhat different and removed from one another, and will perform best when they are linked only through an overarching corporate culture, rather than having direct links between them.

International operations are an interesting issue for Apple. The company is centralized in California, but has some international operations on the retail end, and is very much dependent on international production and distribution. Perhaps reflecting a need to limit the direct scope of international operations, Apple has outsourced much of its international work. It outsources a lot of its international logistics to FedEx, and uses manufacturing firms in China to produce components and assemble the final products. These operations have created problems for Apple, including major public relations headaches from perceived poor treatment of Chinese employees. Some of those complaints result of misunderstanding of different cultures, as Apple's partners in China are actually some of the most sought-after employers. Gewald and Helbig (2006) recommend a joint governance structure for major outsource providers, something that Apple did not really have at the time of the controversy. The controversy highlights the need for Apple to take greater involvement in the way in which its outsourcing partners run their business, and indeed the company was forced to get involved when the scandal broke. Such a system would appropriately recognize that Apple is going to be judged according to American standards, regardless of where in the world its operations are located.

Chapter 11 highlights the issue of strategic leadership. The chapter points out that the three different elements of effective leadership are integrative thinking, overcoming barriers to change and the effective use of power. With Apple, the company has been faced with a leadership transition over the past few years from Steve Jobs to Tim Cook, and thus far has been treading water without a clear sense of strategic direction. Cook has been less effective at using power, because he lacks the reverential power than Jobs had within the company. There may also be issues with integrative thinking, something at which Jobs excelled. The company has not had a smash hit product under Cook and there is a sense among outside observers that perhaps this is not possible, that Cook simply lacks the vision to leverage the company's resources in such a way that result in new product development akin to what it enjoyed under Jobs. The company still succeeds with overcoming barriers to change, in part because of its culture, but there remain questions about the strength of the strategic leadership, and what future direction the company might take. It is known that there is some orientation back towards growth, but whether this is something the executive team can drive going forward is not yet known.

Chapter 12 discusses managing innovation, which is the core issue for Apple. The company's success has come with its ability to synthesize new ideas and technologies, as well as marketing concepts, in such a way that drives strong new products and high end growth. The company must continue to innovate, as innovation has been the major growth engine for Apple in the past decade.

One of the points from Chapter 12 is that radical innovation can be a major source of new market growth, and this has probably been the case for Apple of late. Radical innovation "produces fundamental changes by evoking major departures from existing practices" and results in breakthrough innovations. Apple has an innovation process, but that process was historically guided by Jobs, who represented the catalyst for radical breakthrough innovation. Without that catalyst, it is possible that Apple's innovation leadership is more oriented towards incremental improvements.

Based on current evidence, it appears that the predominant thrust of Apple's innovation system is on sustaining innovation. The company has made a series of incremental improvements to sustain the momentum of its core products, many of which are cash cows for the company. To be fair, rivals like Samsung and HTC…[continue]

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