Porters Five Forces And Apple Inc.

What better time to explore the past, present, and future of Apple, Inc. than at the celebration of Macintosh’s 30th birthday? Apple began in 1976 in Cupertino, California, when three men, Steve Jobs, Steve Wozniak, and Ronald Wayne, decided to start a company that specialized in personal computers. The company began as Apple Computer, Inc. The Apple I was the first product offered by Apple. It was a basic computer kit that included a CPU, RAM, and basic textual-video chips, which is less than what we consider to be a complete personal computer today. (Wikipedia) Apple then produced the Apple II and Apple III, all designed by Wozniak, before the turn of 1980.

1984 was the birth year of the first Macintosh computer. The Macintosh’s success is said by many to be owed to its marketing campaign. It was first introduced to the world in a still-famous commercial aired during the third quarter of the Super Bowl XVIII.

Due to a power struggle between CEO John Sculley and Steve Jobs, Jobs resigned from Apple in 1985 and founded NeXT, Inc. After many failed attempts in the 1990s by Apple to create advanced operating systems and hardware, as well as two CEO changes, Apple purchased NeXT, Inc. and brought Jobs back as an advisor. Stock prices continued to drop under CEO Gil Amelio, and the board of directors replaced him with Steve Jobs as the interim CEO. Jobs immediately began making changes to Apple. (Wikipedia)

The early 2000s was a major turning point for Apple, beginning with the introduction of the first Apple Retail Store. That was followed by the creation of the iPod and the iTunes music store, both of which took off within the first several months of being introduced to the public. The iTunes store is still the leading MP3 store in the world dominating its competition. Apple’s stock went from $6 per share to $80 per share within three years during the first decade of the turn of the century. However, even with this success, Apple could still only boast about 8% ownership of the nation’s personal computer industry. (Wikipedia)

The next few years proved to be dominant in Apple’s history as it transitioned into the mobile device industry. The company introduced its first mobile devices, namely the iPhone, iPod touch, and iPad, for which the company is best known today. In 2007, Jobs announced that the company would be changing its name to Apple, Inc. This was undoubtedly due to its remarkable success in mobile devices and other consumer electronics.

In 2011, Jobs took a medical leave of absence as he battled pancreatic cancer. He died later that same year. Tim Cook assumed the CEO position and has since introduced products such as the iPhone 4S, 5, and 5C, as well as new operating systems iOS 6 and 7. Apple continues to dominate the consumer electronics industry, and will likely lead the next generation into astonishing accomplishments in technology. Industry Analysis of Apple, Inc. using Porter’s Five Forces Model Apple could arguably be a part of two separate industries. Apple clearly started in the computer manufacturing industry with the creation of the Apple I. It further established itself in this market when it created the Mac computers and the Mac OS for them. However, it is obvious that Apple has spent the last decade expanding into the consumer electronics industry.

According to Reportlink.com, “The global consumer electronics industry involves the manufacture, distribution and sale of communications and entertainment devices such as digital and video cameras, telephones, stereos MP3 players, DVDs, VCRs, calculators and televisions.” (ReportLinker, 2014) This industry includes companies such as Samsung, Panasonic, LG, and Sony, to name a few. Apple competes in this industry with its iPod, iPhone, and iPad product lines. The Consumer Electronics Association (CEA) stated that smartphones alone continue to be the primary revenue source for their industry in 2013 (Consumer Electronics Association, 2013). Apple’s iPhone has merged the digital camera, video camera, telephone, MP3 player, calculator, and TV all into one convenient package. Apple nearly sold 34 million of these phones, with quarterly revenue of $37.5 billion, at the end of their 2013 fiscal year (Apple.com, 2013). Plus, Apple offers an iPad to satisfy the DVD criteria in the above definition. Therefore, it is a safe conclusion that Apple operates heavily in the consumer electronic industry of today’s market. If Apple wants to maintain this market success it will have to continue to evolve with future technologies. One report put out by the CEA suggests that technologies such as 3D printers and wearable electronics show future promise for growth. (Consumer Electronics Association, 2013).

Apple could use Porter’s 5 forces model to evaluate their competitive position in this industry in order to position their company to take better advantage of these future trends. Porter’s first competitive force is the threat of new entrants into an industry. The threat of new entrants into the consumer electronics business is low. The initial startup capital requirement for this industry is high. This can partially be attributed to the research and development required to maintain a company in this industry. A new entrant must also compete with companies, such as Apple, that already possess patents and trademarks in consumer electronics. Apple is known as an innovator of products and has secured a certain amount of brand recognition and loyalty for this reputation. Acquiring this level of loyalty requires a great amount of success on a new entrant’s part. Plus the consumer electronics industry is also regulated by several government agencies.

For example, an international labor law might affect how Apple chooses to do business in one of its foreign markets. A decision by the Consumer Product Safety Commission could affect how they design products. A new entrant to this industry must navigate all rules and regulations carefully. Another barrier to entry is that the economies of scale for this industry are not easily achieved. The expenses involved in developing these products require an enormous amount of units to be produced in order to keep the per-unit fixed cost low. New entrants are unlikely to achieve the amount of production capability that Apple already has in a small amount of time. The threat of substitutes for Apple is also relatively low. This can be determined by considering two attributes of Apple. The first is again brand loyalty. Apple has spent years developing and marketing their brand. For the past three decades they have be known as innovators. This type of loyalty means that consumers view their products as unique. For instance, a Galaxy tablet might be less expensive than an iPad but the integration that the iPad software offers is seen by most consumers as superior. It is less likely that a consumer will switch brands when the perceived benefit is lower even if the cost is slightly higher.

The second attribute is Apple’s ability to position itself to take advantage of possible substitutes. After all, Apple already creates products that substitute technologies from its original industry. The iPod, iPhone, and iPad are all substitutes for what their original product, the Mac, can do too. Obviously, Apple is always monitoring and adapting to their changing environment. Similarly, the competitive force of rival competition is also low. Apple has several competitors. Microsoft competes with their Mac computer. LG, Motorola, and Samsung are just a few of their opponents in the smartphone markets. All of these companies invest enormous amounts into research and development in order to produce new and unique products. The simple fact that Apple had success introducing the iPod and iPhone earlier than many other competitors introduced similar devices has allowed them to take the lead in consumer electronics. This again demonstrates how Apple is viewed as an innovator and therefore is perceived to produce superior products. This occurrence has contributed to their product differentiation and brand loyalty. For this reason, Apple is a strong rival to compete with in the consumer electronics industry.

The bargaining power of the suppliers must also be considered when evaluating Apple with Porter’s method. The strength of the suppliers bargaining power is also relatively low. Although suppliers have specific and highly differentiated materials, there are several suppliers. Plus, Apple has accomplished a successful vertical integration within its own company (Knowledge@Warton, 2012). This means that Apple also produces several of its own components used in the creation of its products. For example, the iPhone and iPad use both hardware and software that is developed by Apple. This gives the company a great advantage. Sterne Agee analyst Shaw Wu said in a research note that Apple has been able to advance features like power consumption precisely because it controls the parts that make up the iPad (Knowledge@Warton, 2012).

As a result, Apple does not use a great amount of third party suppliers. Since Apple is a large company and vertically integrated it has a great influence when bargaining with the suppliers that it does well. The last force to consider in Porter’s five forces model is the bargaining power of the customer. Again the strength of this force is low. Apple has expanded itself into several countries, both in retail outlets and online. It has millions of buyers, both individuals and corporations. The amount of potential buyers increases every time Apple expands a product line into another marketplace. While substitutes for Apple products are available, they are perceived as less beneficial due to Apple’s successful marketing campaigns. Their products have been consistently marketed to consumers as differentiated from all others. It is hard for customers to demand lower prices on products that are viewed as superior in the market place.

Company Strategy

Apple has continued to defy the laws of economics. During the downturn of the Great Recession, when other businesses were struggling, Apple seemed to be recession proof. Obviously they have instituted a strategy that helps them differentiate from others in their industry. We will examine a few of their strategies that help them to remain competitive. First we need to examine their management style. When other companies are divided into silo businesses. They require approval from all silos before continuing with a project. Apple only has one central executive committee which allows them to streamline the process of moving forward. Management strategy can only advance any company so far. To become an industry leader, you must have an exceptional product. Let us examine the products and marketing that set them apart from the competition.

In the industry, many companies either have good hardware or software but not both. Apple breaks the industry mold. Their core business is software. Hands down they are exceptional in this area. In order to complement your software, you must develop solid hardware. They are the only manufactures of hardware to run their software. Steve Jobs once quoted Alan Kay of Xerox, “People who are serious about great software need to be serious about great hardware”. This has obviously been accomplished with Apple. In the times of digital music downloads, many companies have tried to develop a strategy to reach all consumers. There have been few that succeeded. Apple has created an advantage with iTunes. Once conceived as an idea for the iPod, iTunes now encompasses not only music but also applications, or “apps,” that may be downloaded to the iPhone, iPad and Mac computers. Apple boasts having over 100 million credit card numbers from customers who have setup accounts on iTunes.

Apple holds over 70% of the MP3 market with sales over $1 billion. In order to sale your products, you must have a good retail strategy to reach customers. Most companies have failed at developing store fronts for their products. This is not the case for Apple. The have been able to defy the odds. They have strategically placed stores across the country in order to enhance their sales. This allows them to have control over their products. Although they sell products through big box stores, 70% of customers prefer shopping through the Apple stores. With this combination of strategies, Apple has been able to compete successfully with their rivals in the consumer electronics industry. Some say Apple possesses a monopsony in the consumer electronics industry, meaning: one buyer, many sellers, which explains the low strength of all of Porter’s five forces. They have made a differentiation in the market that will make it hard for others to compete.

Bibliography

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