There is no doubt that Apple is one of the most successful tech companies. The key components of its business strategy including its product strategy and pricing strategy have proven effective. It is behind some of the most notable innovations and products in the consumer electronics market. The company has endeared a pool of loyal consumers. It has become one of the most valuable companies in the world. To understand further its success, Apple can be analyzed using the Five Forces Model of Michael Porter.
Porter’s Five Forces Analysis of Apple: A Look Into Its Position Within Its Industry and How It Compares to the Competition
1. Industry or Competitive Rivalry
Apple operates in the consumer electronics industry. The competition in this industry is considered intense because of the high firm concentration ratio, the low switching costs of products, and unique preferences in regional markets.
It is also important to note that the company targets different markets. These include the specific markets for smartphones and tablets, the established personal computer markets, and supplemental markets for wearable technologies, other smart devices and appliances, software development, and music and video streaming.
Some of its notable competitors in the smartphone and tablet markets are Samsung Electronics and Xiaomi. Microsoft has remained its biggest competitor in the PC market. The company also competes with other tech companies such as Amazon, Google, and even Netflix.
However, to manage the intensity of competitive rivalry in the industry, Apple has leveraged its competitive advantages such as the benefits of outsourcing, innovation, product differentiation strategy, cost-effective promotion, and its closed product ecosystem. The result is that it has built an expanding pool of dedicated customers.
2. Threat of Substitutes
Note that consumer electronics products have different categories and subcategories. Some of which are potential substitutes for one another. For example, considering iPads or other tablet devices, laptops and desktop computers are substitutes.
Windows and Android operating systems are substitutes for macOS and iOS of Apple because these two have different functionalities and work on different devices. The same is true for Android devices acting as potential substitutes for iPhones and iPads. The threat of substitutes for certain consumer electronics products.
However, Apple lowers this threat through a diversified product portfolio and developing complementary products to create a closed product ecosystem. Hence, instead of choosing a Windows laptop over an iPad, consumers have the option to purchase a MacBook.
3. Threat of New Entrants
Venturing into the consumer electronics market is capital intensive. A company needs to invest in research and development, as well as in manufacturing, distribution, and promotion capabilities to make a mark. However, despite this seeming high barrier, there has been an explosion of new companies offering different consumer electronics products.
China has been home to newer companies that can be considered direct or potential competitors of Apple. Consider Xiaomi Corporation as an example. It started as a smartphone manufacturer but it now has diversified its product portfolio to include tablets, personal computers, smart devices, and home appliances, among others.
There are also other Chinese smartphone and tablet companies that have emerged in recent years such as Infinix Mobile, Meizu, Realme, Vivo, and Oppo. These companies have taken substantial market shares in Southeast Asian and South Asian markets due to the relative affordability of their products compared with iPhone and iPad devices.
Nevertheless, considering the case of Apple, the threat from new entrants is high. These new entrants have the potential to disrupt the entire consumer electronics market and take the established market shares of dominant companies through advances in innovation to create differentiation or through a cost leadership strategy.
4. Bargaining Power of Buyers
The consumers of electronic devices are sensitive to price to a certain degree. Of course, devices such as smartphones and personal computers have become essential nowadays. However, manufacturers recognize that there are consumers with limited purchasing power, thus they include entry-level and mid-range products in their portfolio.
Apple products are expensive. Its premium pricing strategy suggests that it targets consumers who have low to moderate levels of price sensitivity. Still, the fact remains that there is a wide range of alternative products from competitors to choose from. This increases the bargaining power of consumers in the consumer electronics market.
The company addresses this particular force through investments in research and development that allow it to introduce innovative and differentiated products or improve existing ones. Its product ecosystem has also enabled it to lower the bargaining power of its existing customers while also capitalizing further on the fact that loyalty toward its brand remains strong.
5. Bargaining Power of Suppliers
With regard to the bargaining power of its suppliers, the level varies from low and moderate to high. Apple is an established organization. This means that doing business with it can bring substantial financial gains from suppliers. There are also different suppliers of production inputs and components around the world to choose from.
However, in certain situations, the company has some degree of dependence on certain suppliers. The semiconductors or chips it designs and uses that power its Mac devices and iOS devices are manufactured by Taiwan Semiconductor Manufacturing Company. This contract manufacturer has the relevant technologies to produce Apple-designed chips.
Even the screens used in its laptops and smartphones such as the OLED screens of iPhones or the Mini LED screens of its top-tier iPad Pro and MacBook Pro products are outsourced from other manufacturers such as Samsung, Epistar, and Ams Osram. These suppliers have the required technical capabilities to meet the requirements of Apple.
From the aforesaid, it can be considered that for the most part, the bargaining power of several of its suppliers is low to moderate. However, when it comes to critical components such as chips and screens, the bargaining power of suppliers of Apple is high because few companies can meet its design and production requirements.