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.

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/