Apple and Samsung

Competition between Apple and Samsung in the smartphone market introduction into some key conceptsin the smartphone market introduction into some key concepts

in managerial economics

Collge des IngnieursStuttgart, June 21, 2013

Dr. Markus Thomas Mnter

SNORKELING VS. DOING THE DEEP DIVE

COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Mnter 1

GLOBAL SMARTPHONE MARKET

Smartphones are on the rise

Apple and Samsung, by now and increasingly, dominate the market for smartphones capturing more than 50% of the global market (with


global market (with regional variations)

APPLE VS. SAMSUNG PROFITS

But: they do not only take 50% plus of the market Apple and Samsung also capture 100% of the industry profits, all firms making zero or negative profit


APPLE VS. SAMSUNG: KEY ISSUES

Where do profits come from ? What is a profit function?

Which strategies are possible? What is Apples and Samsungs respective strategy?Key issues in


Which strategies are possible? What is Apples and Samsungs respective strategy?

How can Apple and Samsung derive the best strategy using game theory?

How does strategic behavior affect market shares, profitability and prices?

Key issues in understanding

Apple vs. Samsung

OBJECTIVES AND FOCUS FOR TODAY

gain some basic understanding why economics can prove quite helpful for managers assessing situations of strategic competition

get some idea how to analyze the battle between Apple and Samsung in


today, you will

get some idea how to analyze the battle between Apple and Samsung in the smartphone market using game theory (of course, there are other perspectives )

(hopefully) become curious in learning more about real-life applications in managerial economics

AGENDA

What is managerial economics?1

Where do profits come from? 2


Deriving optimum competitive behavior using game theory3

Application to the Apple vs. Samsung case4

Key learnings & discussion5

Economics is a social science that analyzes the production, distribution, and consumption of goods and services a focus of the subject is how economic agents behave or interact and

WHAT IS ECONOMICS, WHAT IS MANAGEMENT?

economics

Management encompasses all business and organizational activities that coordinate the efforts of people to accomplish desired goals and objectives using available resources

management


how economic agents behave or interact and how economies work.

Microeconomics examines the behavior of basic elements in the economy, including individual agents (such as households and firmsor as buyers and sellers) and markets, and their interactions.

Macroeconomics analyzes the entire economy and issues affecting it, including unemployment, inflation, economic growth, and monetary and fiscal policy.

and objectives using available resources efficiently and effectively.

Management comprises planning, organizing, staffing, leading or directing, and controlling an organization or effort for the purpose of accomplishing a goal. Resourcing encompasses the deployment and manipulation of human resources, financial resources, technological resources, and natural resources.

Managerial economics is concerned with application of economic concepts and economic analysis to the typical problems in managerial decision making

applies mainly microeconomic analysis to decision problems trying to optimize business decisions given the firm's objectives and given constraints imposed by scarcity, for example through the use of differential calculus, mathematical programming and game

WHAT IS MANAGERIAL ECONOMICS?

economics management


example through the use of differential calculus, mathematical programming and game theory for strategic decisions, most commonly applied to:

production analysis microeconomic techniques are used to analyze optimum output and production, costs,

pricing analysis microeconomic techniques are used to analyze various pricing decisions including transfer pricing, price discrimination, .

risk analysis various models are used to quantify risk and asymmetric information and to employ them in decision rules to manage risk

organizational analysis model are used to determine optimum internal structure of the firm, make-or-buy and outsourcing, governance and internal control, and incentive schemes

managerialeconomics

AGENDA

What is managerial economics?1

Where do profits come from? 2


Deriving optimum competitive behavior using game theory3

Application to the Apple vs. Samsung case4

Key learnings & discussion5

APPLE VS. SAMSUNG

Apple and Samsung dominate the market for smartphonescurrently with their models iPhone and Galaxy

Both models are offered as (subsidized) packages from telcos


packages from telcosas well as unlocked stand alones

From a consumers perspective what is your willingness to pay for any of these two alternatives?

WILLINGNESS TO PAY

The willingness to pay describes, how much money an individual would pay at the maximum to purchase some product

Most often, this sum varies considerably across individuals

maximumwillingnessto pay


across individuals

number ofindividuals

0

PRICE DEMAND SCHEDULE

The willingness to pay can be translated easily into a demand curve also termed price demand schedule

price p


quantity q0

PRICE DEMAND SCHEDULE

the price demand curve is the graph depicting the relationship between the price of a certain commodity and the amount of it that consumers are willing and able to purchase at that given price

price p ( ) bqaqpp ==

a

SSSS

AAAA

qbap

qbap

=

=


at that given price

p: price

q: quantity

a: maximum willingness to pay

1/b: measure for size of the market

Price demand schedule can be identified doing market research

quantity q

-b

0

REVENUES

Revenue is income that a company receives from its normal business activities, usually from the sale of goods and services to customers

Revenue is often referred to as the "top

revenues R ( )

( ) 2bqaqqbqa

pqqRR

=

===


referred to as the "top line" due to its position on the income statement not to be mixed up with profits, which is bottom line

quantity q

a

-b

0

COST STRUCTURE

Costs are the sum of fixed and variable costs

marginal cost is the change in the total cost that arises when the quantity produced changes by one unit

variable costs are expenses that change in

costs C ( ) FcqqCC +==

costs C


expenses that change in proportion to the activity of a business, i.e., production

fixed costs are business expenses that are not dependent on the level of goods or services produced by the business

Costs can be identified analyzing P&L statements and balance sheets

quantity q

fixed costs F

variable costs cq

0

costs C

PROFITS (1) SINGLE FIRM

in managerial economics, profit is just revenues minus costs (cash flow perspective)

in business, there are lots of other profit-concepts (Earnings Before Interest, Taxes,

profits

Fcqbqaq

CR

==2

revenues R

costs C

costs C

revenues R


Before Interest, Taxes, Depreciation, and Amortization EBITDA, Earnings Before Interest and Taxes EBIT, etc.) mainly for tax and depreciation issues

quantity q 0

CR =

costs C

STRATEGY, PROFITS, SHAREHOLDER VALUE

profits as revenues minus costs measure success of an organization and guarantee

the direction and scope of an organization over the long term

which achieves competitive advantage for the organization through its configuration of resources (aka strategic variable) within a changing industry environment to meet the needs of markets/customers and to fulfill stakeholder expectations

strategy


Shareholders are the owners of a company, hence they own all equity and receive all profits as dividends

Shareholder value is simply the discounted sum of all future profits and measures the value of a company

shareholder value

profits as revenues minus costs measure success of an organization and guarantee survival

for simplicity and tractability, it is assumed that firms strive to maximize profits (however, there lot of other objectives, )

profits

PROFITS (2) SINGLE FIRM

Maximum profits are derived choosing a strategy (a strategic variable), here: quantity

FOC and SOC give optimum profits

Solving for strategic variable (6) denotes

max!)4(

)3(

)2(

)1(

2 ==

+=

=

=

FcqbqaqCR

FcqC

pqR

bqap


variable (6) denotes necessary action to realize optimum profits

For (6), there is a straight forward economic interpretation: (a-c) is a measure for competitiveness, (1/b) is a measure of market size

.0*

,0*

,0*

2*)6(

02)5(

max!)4(

Apple and Samsung

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