Apple Strategic Analysis: Five Forces, PEST, and SWOT

Industry Analysis and Porter's Five Forces

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

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 across 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 Form 10-K, 2015). 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 also represented a strong growth market at 34%, consisting of South Korea, Australia, New Zealand, and the Southeast Asian nations. Other markets, such as the Middle East and Africa, are structured under the Europe segment.

Working with this industry definition, several tools help illuminate the profitability and desirability of this market. 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 Porter's Five Forces analysis highlights that this is generally a positive industry in which to operate, and that Apple holds a powerful position that accentuates these benefits. The five forces that determine industry profitability 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).

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 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 significant price sensitivity — they are generally willing to pay the going rate for these products. Consumers are more sensitive to features, so feature-rich products reduce price sensitivity further. This allows high-end products to carry high margins.

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. Apple's economies of scale are critical to the success of its suppliers. While Apple can readily change suppliers, suppliers will never find another Apple. This gives Apple significant bargaining power.

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 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 is Xiaomi, which specializes in lower-end phones for the Chinese market. Xiaomi held a 1% share of the global market in 2012 and by 2015 had grown to 5.6%. Huawei is another low-cost Chinese manufacturer that doubled its share between 2012 and 2015 (IDC, 2015). Most of these companies build their share at the expense of the high-end market as the difference between premium and mid-range models begins to shrink. The threat of new entrants is high, and will continue to be so as long as the gap between the best phones and mediocre ones continues to narrow.

Threat of substitutes is fairly low. In the space of just a few years, smartphones have become an essential item for most consumers, especially in the West. They are feature-rich, replacing the need for several different devices. It would be difficult to conceive of a product that could replace this sort of multi-functionality. There was a brief risk that tablets might take market share from smartphones, but a move to larger smartphones essentially parried that threat. Moreover, Apple was the leader in tablets anyway, and would have merely cannibalized itself. There is no disruptive technology on the horizon to threaten smartphones as the dominant form of mobile technology.

Intensity of rivalry among firms is fairly intense. This rivalry occurs both at the handset level and at the operating system level. At the OS level, Apple competes primarily with Google and, to a lesser extent, Microsoft. At the handset level, Samsung is the market leader, while the other major market-share holders do not compete in the high-end segment. Apple basically operates in two duopolies simultaneously. In a duopoly, competitive intensity is high, and competitors often make moves based on what each other is doing. Typically, this results in falling prices, but this industry is unique in that features are the main draw and there is relatively little price elasticity of demand. As a result, both firms enjoy healthy profits. Only at the lower end — where consumers are price-sensitive — does rivalry manifest in tighter margins. For Apple and Samsung, the more consequential expression of rivalry is the race for innovation, which results in both companies spending heavily on R&D, though nowhere near as much as they earn in profits.

All told, this is a profitable industry in which to operate. Apple holds substantial bargaining power over buyers and suppliers, and the threat of substitutes is low. The threat of new entrants is high, but new entrants typically enter at the low end and have difficulty matching Apple's technology. This also insulates Apple from the most dangerous forms of rivalry. As long as Apple continues to be the technology leader — or at least matched with Samsung and Google in that regard — it will continue to enjoy high profit margins.

PEST Analysis

A PEST analysis examines the external macro-environment. The political environment is generally favorable, though Apple has occasionally encountered problems with foreign governments. There have been patent lawsuits between Apple and Samsung, and Apple has faced some 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 a major constraint 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 resilient to economic slowdowns, as its products are popular and many of its customers fare 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 broader stock market, though equity 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 enjoys a favorable public image, and its products are viewed as innovation leaders. There are millions of Apple loyalists who essentially discount the possibility of buying from any other company. While Apple has come under fire for labor practices at subcontractors such as Foxconn, this negative press has had little measurable effect on sales. People not only want smartphones, but are deeply habituated to them, and they prefer feature-rich, high-end devices.

The technological environment is moderately positive. As the smartphone and tablet markets mature, features are becoming commoditized. While the first few years of the smartphone era saw exceptionally high rates of innovation, more recent iterations have produced more incremental changes. Apple remains at the forefront of technological innovation in its industry, but the pace of innovation is slowing. The gap between lower-end phones and premium devices is narrowing, which could eventually pressure prices even at the high end — a potential challenge for Apple in the future.

Competitive Rivalry

While Apple is competing primarily with Samsung today, in the near future it may face many other serious competitors. In particular, companies such as Xiaomi and Huawei are building their businesses in China while simultaneously learning how to make better phones. When these companies are able to deliver products that are relatively capable at a fraction of the price of an Apple device, they will begin to erode Apple's business. While there is a core of loyal Apple customers, not all smartphone buyers share that loyalty. Apple's share of the global smartphone market declined for several years from 2012 to 2014 before recovering with the iPhone 5. In general, however, market growth is occurring at the lower end as consumers recognize that entry-level phones meet their needs. This trend is more pronounced in emerging markets, where disposable income is lower, but may increasingly appear in industrialized markets as well.

This dynamic could fundamentally change the nature of competition. At present, Apple is locked in a duopoly with Samsung — a market structure characterized by two firms competing directly against each other and reacting to each other's strategic moves. This is normally associated with declining margins, but because competition here centers on features rather than price, both firms sustain high spending on R&D and relatively healthy profits. The situation becomes more problematic if secondary players emerge with products that are meaningfully comparable to Apple's. At that point, prices across the market could decline, and Apple's profit margins would face a steep cut. R&D spending might not generate the same return on investment, and innovation could begin to plateau. How soon this scenario might unfold is uncertain, but it is a natural stage in the product life cycle. Competitive rivalry is not currently harming Apple, but that could change with the emergence of stronger secondary competitors capable of driving down smartphone prices.

Apple's tablet business is already suffering, as consumers are increasingly concluding that most people do not need both a phone and a tablet. As consumers make this trade-off, smartphones are winning. This will challenge the iPad going forward. Apple's personal computer business, by contrast, has remained fairly stable, with the company's strength concentrated in the consumer market. Its relatively low share of the enterprise market implies a correspondingly higher share among individual consumers, and customers in that segment tend to be repeat buyers.

Overall, while competitive rivalry is not damaging Apple today, a growing number of market entrants and the blending of the high and mid-tiers of the market could create considerably greater competitive intensity in the consumer electronics business in the years ahead.

References

Apple Form 10-K. Retrieved April 14, 2016 from http://files.shareholder.com/downloads/AAPL/1569293306x0x861262/2601797E-6590-4CAA-86C9-962348440FFC/2015_Form_10-K_As-filed_.pdf

IDC. (2016). Smartphone OS market share, Q2 2015. IDC Research. Retrieved April 14, 2016 from http://www.idc.com/prodserv/smartphone-os-market-share.jsp

IDC. (2015). Smartphone vendor market share, 2015 Q2. IDC Research. Retrieved April 14, 2016 from http://www.idc.com/prodserv/smartphone-market-share.jsp

Interbrand. (2015). Best global brands. Interbrand. Retrieved April 14, 2016 from

MSN Moneycentral. (2016). Apple Co. Retrieved April 14, 2016 from http://www.msn.com/en-us/money/stockdetails/analysis/fi-126.1.AAPL.NAS

QuickMBA. (2010). Porter's five forces. QuickMBA.com. Retrieved April 14, 2016 from http://www.quickmba.com/strategy/porter.shtml

Statista. (2014). Leading e-retailers worldwide in 2014, based on retail revenue. Statista. Retrieved April 14, 2016 from http://www.statista.com/statistics/287950/leading-e-retailers-worldwide-based-on-revenue/