Apple has established a reputation as an innovator by offering easy-to-use products that cover a broad range of segments in the industry. The main findings included the industry is the fastest growing industry and the product lifecycle is very short (6-12 months). Currently, Apple is the dominant firm but it is facing increased competition from rival firms. Introduction
This report gives an analysis of Apple Inc., a worldwide organisation, by using Porter’s Five Forces, giving an insight into the company’s strategic position, the reasons behind it and how the forces interact with each other. The ‘strongest force’ becomes vital for ‘strategy formulation’ for a company. (Porter 1985, 35). Its true core is Technology and Product Design although it has also moved to entertainment and media services sector that add significant value to their products. It is in an industry which is changing rapidly in terms of technology advancement thus it is forced to keep up with changes or else risk the potential loss of market share. Competitive Rivalry within the consumer electronic industry
The worldwide smartphone market was ‘forecast to grow 55% year over year in 2011’. This increase makes the industry the fastest growing meaning greater profits for Apple but also a greater threat of competitive rivalry as firms seek to take advantage of the expanding market. According to IDC, an analyst group, cheaper rivals including Samsung and Amazon have cut Apple’s market share ‘from 60 per cent to 50 per cent in the past 12 months’ in the tablet sector of the industry (The times, 2012). In response to the ‘mounting pressure from its closest competitors’ Apple released the IPad mini and IDC predicted this ‘would boost Apple’s already dominant position in the tablet market’. Apple ‘spent $933 million’ on ‘advertising battles’ (Porter 1985: 46) to strengthen its brand name which reduces its rivalry as consumers are less like to switch to Apple’s competitors. Also, it can be seen that the firm’s strategic position is producing differentiated products focused on the high end of the market by offering high-quality, unique design products which have premium prices (40% profit margin).
Threat of new entrants
This is low due to the high capital costs of R&D and marketing related with the industry. Potential entrants are put off by the risk of entering the industry as sunk costs cannot be recovered if they are unable to penetrate the market. They also would take a long to build a customer base. In addition, Apple ‘has the most powerful patent portfolio in consumer electronics’ which protects its innovations ensuring its products cannot be imitated creating significant ‘barriers to entry’ (Porter 1985:36). However, Microsoft has released its own tablet recently thus not necessarily a low threat of entry. Competition may arise if a firm is strongly established in another industry and enters the industry, like Amazon ‘entering the tablet market’ (BBC News, 2011). Amazon’s aggressive strategy of break-even prices compared to Apple’s premium pricing strategy has seen Apple lose some ground.
Threat of Suppliers
Apple has its own unique operating system that it has vertically integrated with its hardware unlike its competitor Samsung who relies on Google’s Android system or Microsoft’s Windows system. On the other hand, Apple has ‘156 suppliers’ including Intel which makes most of Apple’s processor chips and ironically Samsung which ‘was the sole supplier of the A5 chips used in the IPad 2’. Shortages of these chips would lead to problems as Apple has no alternatives has a weaker ability to force component prices down. Recently ‘Apple started to lessen its dependence on Samsung for components’ (The Wall Street Journal, 2012) as it tries to ‘diversify its supply chain’ (Dailymail, 2012) in an attempt to increase its bargaining power on buying hardware for its products.
Bargaining power of buyers
The power of consumers have is rising because of the increasing number of choices in the industry. The low switching costs is evident as Apple saw its market share in the smartphone sector fall to 17.8 % as consumers opt for other products which are cheaper during tough economic times. Furthermore the distributor’s pressure (such as Carphone Warehouse) for lower prices or better terms has increased buyer power but this again is countered by Apple by having their own retail stores (394) in 14 countries. Apple Stores act as advertisements for the brand by providing a point of contact between the firm and its customers and improving its customer services. However for countries such as United Kingdom the bargaining power of buyers is reduced as many of the consumers will be tied into long term contracts so switching from one handset to another will be difficult and costly for the consumer. This use of strategy lock-in reduces its customers switching to a competitor though its competitors carry out the same practice.
Threats of substitutes
This is very low as the smartphones and tablets industry is already established and there are no products till now that can replace these. Apple’s robust brand loyalty and fan base help it to reduce the threat of substitutes as customers will be less likely to buy other substitutes. Moreover, Apple carries out R&D operations costing ‘$3.4 billion’ annually. This enables them to be in the forefront of new technologies and potentially new product lines. These 5 forces interact with each other dynamically, different from what Porter initially stated. Increased rival competition leads to a greater threat of buyer power and strategic alliances with suppliers make these firms more competitive. In the future we may see Apple’s strategy being influenced more by the prices of competitive products.
Apple should lower its profit margins in this period of economic recovery so as to retain it’s market share if not gain some. Furthermore it should invest more in R&D to the levels of Google and Microsoft (from 2% of revenue to about 8%).
Apple is seen to be pursuing a broad differentiation strategy combining all of Porter’s five forces. I believe it must continue to differentiate its products from its competitors so as to maintain its sustained competitive advantage in the long run. No other firm in the industry has a system like Apple’s and it would cost a fortune to replicate it.
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