In spite of Apple Inc’s increasing net sales in the last three years, iPod net sales are decreasing at an alarming rate (Table 1). This paper will provide an analysis of the market forces driving sales of the iPod and make suggestions for recovery of sales by focusing on the iPod Touch platform. An overview of Apple Inc (Apple) is provided, then several analytical tools are used to provide insight to both the internal and external environment that Apple is operating within. These tools include Michael Porter’s Five Forces analysis, a SWOT analysis, a review of industry key success factors, and a competitive strength assessment. Based upon discussion and analysis provided using these tools, recommendations will be made that will ensure the iPod product line is secured.
Apple Inc. designs, manufactures and markets mobile communications and media devices (iPhone and iPad), personal computers (Mac) and portable music players (iPod Touch, iPod Shuffle, iPod Nano and iPod Classic). Apple also markets digital content and applications through its various software platforms (iTunes, iTunes Store, App Store, Mac App Store, iBookstore and Apple TV). More recently, Apple also offers online software solutions to help its customers with management of digital media, personal organization and on line creativity (iCloud, iLife and iWork). Underpinning these hardware and software platforms is Apple’s operation system software packages, iOS and OS X.
These operating software packages provide the inter-operability and integration between devices and applications that is a core strength for Apple. Company unit sales and net sales for each product for the last three years are shown in Table 1. The iPod product family is experiencing a significant downturn. Apple reports that this can be attributed to contraction in the market for MP3 players (Apple, Inc., 2012). To combat the market contraction, the analysis in this paper will show that a shift in the iPod product mix toward the iPod Touch is necessary. The Mac product line is flat or is experiencing a down turn. Apple reports that this is because of a market decline for desktop computers (Apple Inc., 2013). However, this issue is not addressed in this paper.
Michael Porter’s Five Forces Model of Competition is an analytical framework for assessing the competitive pressures associated with five unique forces in a company’s external operating environment (Thompson, 2014). An evaluation of each force as it applies to Apple, specifically to its iPod product line, follows. Rivalry Among Competitive Sellers: Buyer demand for MP3 players is declining primarily due to the inclusion of music playing capability in most cellular phones (Apple is no exception) and the advent of streaming music and media which requires a connection to the internet. As the cell phone market continues to grow, the MP3 player market will continue to decline. Because of the MP3 market downturn, MP3 providers, including Apple, are reducing prices to keep market share. In turn, this is eroding profitability. Still, Apple enjoys a commanding market share of MP3 players due to the availability of content, superior technical support and customer loyalty.
Other products on the market look suspiciously like the iPod, including Creative Lab’s Zen music player and SanDisk, but without the vast libraries of content available through iTunes, iBookstore, Appstore and Apple TV, rival sellers cannot compete. Because of these issues, industry rivalry in the MP3 player market can be characterized as fierce to strong, but this is mitigated by the capabilities of the iPod Touch. Potential New Entrants: The iPod Touch separates itself from the MP3 market, including its own iPod cousins, because of its capability to access streaming music and video, email, internet and gaming over wifi networks. The iPod architecture is based on the iPhone and is relatively inexpensive to produce (low R&D expenses). On the other hand, competitors must develop both the architecture and on line digital content in order to compete. Because of these high entry barriers and the lack of growth in the MP3 market in general, the threat is of potential entry is weak.
Substitute Products: The decline in the MP3 market is due to the lack of capability that customers expect (streaming content and access to internet and gaming). However, the iPod Touch is less susceptible because it has these capabilities using wifi. In essence, the iPod Touch is already a substitute product to the MP3. Other substitute products include the entire mobile phone industry! Not only is the iPod Touch in competition with the iPhone, it is in competition with rival mobile providers. Good mobile phones that play music are readily available in products offered by Samsung, LG, Sony, Nokia and Google, all using the Android platform. Additionally, switching costs are relatively low and rival companies use price cuts and are willing to accept lower product margins. Regardless, the strength of the iPod Touch is that it is a viable option for those customers wanting access to content without a monthly service fee for cellular service. Given the substitute market is the mobile phone market, the competition from substitute products can be characterized as fierce to strong. Bargaining Power of Suppliers: The industry has many suppliers and uses components that are generally available from many suppliers.
However, there are a few components that are not used by competitors, and new products often utilize components that may be available from one source until fully developed. Although Apple has enters agreements with suppliers, the global economy could introduce pricing fluctuations and/or industry wide shortages. Since the iPod product line typically uses capability that was first developed for new iPhone offerings, some of these threats are minimized for the iPod product line. Therefore, the combined bargaining power of suppliers is characterized as moderate to normal. Bargaining Power of Buyers: Apple’s approach to winning and maintaining customers is to provide a high quality buying experience and then provide superior post sales support. Coupled with its seamless integration between hardware, software and between products, Apple’s brand loyalty is extremely strong. It is a highly differentiated product that generally commands a higher price than rival products. Offsetting this advantage is that the cost to switch is relatively low and competition from rivals is fierce. Because of this, the bargaining power of buyers is characterized as moderate to normal.
A SWOT analysis is a review of the internal resource strengths and weakness and external opportunities and threats. It is analytical tool for evaluating a firm’s resources and capabilities and determining whether they are well matched to its market opportunities and external threats (Thompson, 2014). A summary SWOT analysis for Apple Follows. Strengths: Apple’s strengths include its strong brand loyalty. Such loyalty is built upon its ability to design its operating systems, hardware, application software and services. Additionally, Apple prides itself on its product ease of use, seamless integration and innovative designs. Apple also provides a high quality buying experience and post sales support. Other strengths include strong financial performance, brand reputation and its retail stores.
Weaknesses: Apple’s weaknesses include its high price, decreasing gross margins, competition for talent with the necessary skills and litigation. Opportunities: High demand in iPhone, iPad and iTunes (including software and services) markets and increasing demand for cloud bases services. The launch of iTV will increase on line content, benefiting all Apple products. Threats: Rapid technological change, price pressure from competitors, growth in the Android operating system, competitor moves in online media markets (such as Wal Mart, Amazon and online music companies) represent the most serious threats facing Apple.
Key Success Factors
Key success factors are those competitive factors that most affect industry members’ ability to compete successfully and profitably (Thompson, 2014). The industry key success factors include price, product features, product quality and reliability, design and innovation, service and support and corporate reputation.
Competitive Strength Assessment
Although the emphasis for this paper is on the iPod product line, the five forces analysis clearly show that the competition in the iPod line has evolved to competition amongst those devices that can provide streaming content and other capabilities, such as access to email, internet and gaming. Therefore, the competitive strength assessment provided in Table 2 includes the top four competitors that provide such capability–mobile phones.
A significant shift in the iPod product mix toward the iPod Touch is imperative. The iPod Classic, Nano and Shuffle no longer provide the features that are in demand by customers. The MP3 player market will decline in the face of improved technology and innovation, but the iPod Touch may not experience the same decline because it is not just an MP3 player—it is a mobile content platform. The iPod Touch is based on the platform developed for iPhone and can be upgraded, expanded and growth alongside the iPhone product line. It is a viable alternative to both iPhone users and cell phone users who do not wish or cannot afford a monthly service fee for cellular service. Branding it as such will secure the product line.
Apple Inc. (2012). 2012 Form 10-K. Retrieved from http://investor.apple.com/financials.cfm. Apple Inc. (2013). 2013 Form 10-K. Retrieved from http://investor.apple.com/financials.cfm. Thompson, A. A. (2014). Strategy: core concepts and analytical approaches (3rd ed.). Burr Ridge, IL: McGraw-Hill Education.