Porters Information Technology Industry Analysis
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Apple Inc is one of the leading computer firms in the world. Apart from the design and manufacture of personal computers (represented by its Macintosh brand), its core business also revolves around the production of computer peripherals (e.g. the Xserve servers), software, networking equipment, portable digital music players (the ipod), and the online sale of video and audio (through iTunes stores) (Annual Report, 2006, p.7; website, 2009).
In the section that follows, we shall examine the industry in which Apple operates, through Porter’s analytical framework. Michael Porter’s five forces analytical framework isolates five forces which are critical to determining the attractiveness of an industry. These forces include industry rivalry, the bargaining power of suppliers, the bargaining power of sellers, the threat of new entrants, and the threat of substitutes. To these can be added the relative power of other stakeholders (Porter, 1980).
2. Threat of New Entrants
Markets that are easy to enter (by virtue of having very few or no barriers to entry) normally face a heightened threat of competition from new entrants. Factors that may restrict entry include the existence of government-imposed barriers, patents and proprietary knowledge, asset specificity and a high threshold of scale economies (Keegan and Green, 1997, p.256). The computer industry not only has high fixed costs but also requires a huge capital outlay, factors that act as barriers to entry and reduce the threat posed by new entrants. High brand awareness also acts as a significant entry barrier, although the high rate of growth of the market makes it very attractive to new entrants (Datamonitor, 2008). In summary therefore, the threat posed by new entrants is moderate to low.
3. Rivalry among Existing Firms
This refers to the degree of competition prevalent among competing firms. This is determined by the number of firms in the industry, the rate of growth of the market, the nature of fixed costs, and the extent to which products are differentiated (Hill and Jones, 2007, p.50). According to Datamonitor (2008), the global computer industry is experiencing fast growth. Between 2003 and 2007, it had an annual growth rate of 5.5%. In 2007, it had a growth rate of 5.6%, and was valued at $399.8 billion. It is expected to grow by 34.4% by 2012 (a compounded annual growth rate of 6.1%), by which time it will be valued at $537.3 billion.
A high rate of market growth implies that firms can grow by simply being part of an expanding market and without taking away from their competitors which therefore translates into low rivalry. In addition, Datamonitor (2008) states that industry fixed costs are low, mainly due to the fact that firms in the industry outsource production and assembly to third party firms based in low-cost countries and do not have to maintain extensive production facilities. According to Porter, low fixed costs also translate to low industry rivalry. According to Datamonitor (2008), the main buyers of computers are business buyers and these face high switching costs especially because they normally enter into supply contracts.
According to Grimm, Lee and Smith (2005, p.53) high switching costs normally translate into low industry rivalry because the likelihood of buyers switching brands is limited and the firms do not have to fight hard to capture and retain customers. Even though brand awareness is high (implying a high degree of product differentiation), brand loyalty is low which adds to the level of industry rivalry. In summary therefore, the threat posed by industry rivalry is moderate to low (Datamonitor, 2008).
4. Threat of Substitute Products or Services
According to Datamonitor (2008), much of the functionality associated with PC’s is largely unavailable elsewhere. Even so, the emergence of next generation gaming consoles, as well as mobile phones and other hand-held devices that increasingly pack much of the PC functionality in them are becoming viable alternatives. The threat posed by substitutes can therefore be described as low to moderate.
5. Bargaining Power of Buyers
The major purchasers of computers are businesses. According to Datamonitor (2008), the buyers are many and fragmented given the ubiquity of computers in both the domestic and professional environments, and therefore the bargaining power of the buyers is weak.
6. Bargaining Power of Suppliers
Suppliers in the industry comprise manufacturers of electronic components, including those manufacturing IC chips. With the possible exception of Intel whose bargaining power is extremely high, a result of its high brand value, supplier switching costs and bargaining power for brand name firms like Apple is low. This is due to the fact that very little differentiation between components exists, with most of them being procured from low cost manufacturers in low cost countries. However, contract manufacturing firms (ODMs and EMSs) to whom the electronic component manufacturers outsource production possess high bargaining power and have high switching costs (Datamonitor, 2008).
7. Relative Power of Other Stakeholders
This is the influence that suppliers, competitors, pressure groups, customers, employees, shareholders, government taxation and spending, the management, the society, trade unions, and the ethical and moral standpoint of top management (Morden, 2007, p.195). According to Slob (2006), brand name firms such as Apple outsource most of their production to contract manufacturers (CM) in low cost countries such as Philippines and China. In these countries, freedom of association as well as collective bargaining is severely restricted and therefore the relative power of employees and trade unions is low. The influence of the other stakeholders has not had much weight over the industry, and therefore the relative power of the other stakeholders can be described as low (“Computers”, 2007).
The threat of new entrants is low, industry rivalry is low, the threat posed by substitutes is low to moderate, and the bargaining power of the buyers is weak. The bargaining power of suppliers for brand name firms is low (and high for contract manufacturers), with the relative power of other stakeholders being low. Overall therefore, the industry in which Apple competes is attractive / favorable and not hostile.
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