Apple Industry Analysis

Apple competes in the consumer electronics industry, predominantly on the hardware side, but also on the software side. The most significant product that the company makes is the iPhone, which accounts for $155 billion in revenue out of a total revenue of $233 billion. The Mac computers generate $25 billion, the iPad $23 billion, services $19 billion and "other" $10 billion. Most of other consists of software and peripheral products, along with any residual iPod sales that might still exist (Apple Co. 2015 Form 10-K). This breakdown highlights that Apple is primarily a hardware company, though its hardware is embedded with the company's own software. Of these businesses the iPhone is a major growth business, having increased 52% over the previous year on the basis of the iPhone 5 release. The iPad is a declining business, having dropped 23%, while other businesses saw more modest increases. "Other products" increased 20% in FY 2015, but that merely restored revenues following a 17% decrease in 2014 (Apple Co. 2015 Form 10-K).

Apple's business is global in nature. The company operates many of its own retail channels, including its own stores and online retail site. In 2014, Apple was the second-biggest online retailer in the world, with online revenues of $20.6 billion. While this is nowhere near the level of market leader Amazon, it is higher than any other company, and most of those companies sell a very broad range of products, in multiple countries (Statista, 2014). The company earned $93 billion in revenue in the Americas, $58 billion in Greater China, $50 billion in Europe, $15 billion in Japan and $15 billion in the rest of Asia-Pacific (Apple 2015 Form 10-K). Sales growth in the Americas was strong at 17%, and solid in Europe at 14%. The largest growth region, however, was Greater China at 84%. Greater China consists of the PRC, Taiwan, Hong Kong and Macau. The rest of Asia Pacific is also a strong growth market at 34%. This market consists of South Korea, Australia, New Zealand and the Southeast Asian nations. Other markets such as the Middle East and Africa are structured under Europe.

Working with this industry definition, there are a few different tools to understand the profitability and desirability of this industry. As a general rule, this is a high growth industry with large profit margins, both characteristics that Apple has been able to leverage significantly. A Five Forces analysis highlights that this is generally a positive industry in which to operate, and that Apple has a powerful position that accentuates these benefits. The five forces that determine profitability in an industry are the bargaining power of buyers, the bargaining power of suppliers, the threat of new entrants, the threat of substitutes and the intensity of rivalry among existing competitors (QuickMBA, 2010).

The bargaining power of buyers is low. There are several factors that influence this. First, there are few players at the high end of the smartphone market, but most buyers in the industrialized nations prefer to buy at the high end. Essentially, the high end is a duopoly between Apple and Samsung. Consumers have relatively little knowledge about the costs of producing smartphones and other electronics, and they lack price sensitivity. They generally are willing to pay the going rate for these products, and this gives companies at the high end the advantage. Consumers are more sensitive to features, so feature-rich products reduce price sensitivity. This allows the high end products to carry high margins.

The bargaining power of suppliers is low. In general, suppliers in this industry offer commodity goods, so companies like Apple can shop around for the best deal. Furthermore, there are more suppliers in the industry than there are major vendors like Apple. This is important, because Apple's economies of scale are critical to the success of its suppliers. While Apple can readily change suppliers, the suppliers will never find another Apple. This gives Apple significant bargaining power over suppliers.

The threat of new entrants remains fairly high. The high availability of OEM parts allows many new companies to enter this business. These include established players that once had a bigger role in the industry such as Nokia or Motorola, operating system producers like Google or Microsoft, and it also includes low cost upstarts, mostly from China, who enter via the low end of the market and build share from there. An example of the latter would be Xiaomi, which specializes in lower-end phones for the Chinese market....

Xiaomi had a 1% share of the global market in 2012, and by 2015 had built up a 5.6%. Huawei is another low-cost Chinese manufacturer that has doubled its share between 2012-2015 (IDC, 2015). Most of these companies build their share at the expense of the high end market, as the difference between high end phones and the mid-range models begins to shrink. So the threat of new entrants is high, and will continue to be as long as the gap between the best phones and the mediocre ones continues to shrink.
The threat of substitutes is fairly low. In the space of just a few years, smartphones have become an essential item for most consumers, especially ones in the West. The reason for this is that they are feature-rich, replacing the need for several different items. It would be difficult to conceive of a device that replaced this sort of multi-functionality. There was risk, for a short time, that tablets might take market share from smartphones, but a move to larger smartphones has essentially parried this assault. Moreover, Apple was the leader in tablets anyway, and would have merely cannibalized itself. Thus, there is very little risk, as smartphones have proven the more popular version of mobile technology and Apple tends to be involved in any potential substitutes. There is no disruptive technology on the horizon.

The intensity of rivalry among firms is fairly intense. This rivalry occurs both with handsets and with operating systems. At the O/S level, Apple competes primarily with Google and a little bit with Microsoft. At the handset level, Samsung is the market leader, and the other major market share holder s do not compete in the high end segment. Apple basically operates in two duopolies simultaneously in this business. In a duopoly, the intensity of rivalry is high. Competitors often make moves based on what each other is doing. Usually, this results in prices falling, but this industry is unique is that features are the main draw and there is relatively little price elasticity of demand. This means that there are healthy profits for both firms, and only at the lower end where consumers are price sensitive does the intensity of rivalry manifest in tighter margins. For Apple and Samsung, the manifestation of intensity of rivalry is more in the race for innovation. This results in both companies spending a lot of money on R&D, though nowhere near as much as they are earning in profits.

All told, this is a profitable industry in which to operate. Apple holds substantial bargaining power over buyers and suppliers, the threat of substitutes is low. The threat of new entrants is high, but they usually enter at the low end and have trouble catching up to Apple in terms of their technology. This also insulates Apple from dangerous rivalries. As long as Apple continues to be the technology leader, or matched with Samsung and Google in that regard, then Apple will continue to enjoy a high profit margin on its products.

PEST analysis

A PEST analysis examines the external market. The political environment is generally favorable, though Apple has occasionally seen problems with foreign governments. There have been lawsuits between Apple and Samsung over patents, and Apple has faced some minor political scrutiny over labor practices at its contractors. In general, however, Apple has not faced significant political impediments to its business. The economic environment does not appear to be relevant for Apple. During the last recession, Apple was in the early stages of marketing the iPhone, and the product sold at a tremendous pace despite the economic downturn. Apple has proven to be resilient to economic slowdowns as its products are popular and many of its customers do better in poor economic conditions than non-customers. Apple's beta of 0.98 indicates that the company's stock moves roughly in line with the stock markets, but the stock markets have been somewhat disconnected from U.S. economic growth for several years (MSN Moneycentral, 2016).

The social environment is strongly positive for Apple. The company has a favorable public image, and its products are viewed as innovation leaders. There are millions of Apple fans who basically discount the possibility of buying products from any other company. While Apple has come under fire for labor practices at its subcontractors, such as in the Foxconn scandal, the reality is that this little bit of bad press does not affect the company's sales. Overall, Apple has an exceptionally positive social environment. People not only want smartphones, but they are addicted to them, and they have a…