Porter’s Five Forces Analysis of Apple Inc.

Apple Inc. Five Forces Analysis

Porter’s Five Forces model is an analytical tool that was named after its developer Michael E Porter. Porter developed this model in 1980 and since then it has come to be widely used to analyse the profitability and attractiveness of industries. The focus of the model is on five important forces that are a part of every industry and market. These competitive forces can be affected or exploited to increase profitability.  Managers can form strategies based on the strength of these forces to improve the profitability of their businesses.

They can also gain a better understanding of the industry structure and their company’s position and formulate effective strategies for growth. Here is a five Forces analysis of the famous technology brand Apple. It is also one of the most valuable brands in the world. This example analysis evaluates the forces affecting competition in Apple’s external environment and the resulting effect on it.

Apple has been through several ups and downs since its foundation. It became a world famous name through its Mac Computers and OS, Iphones, IPad, Itunes and Ipods. In the past several years it has released products that are known exclusively for excellent design and quality. The fundamental focus of Apple is innovation which has driven its growth and success.  The five forces that can affect the competition and profitability of Apple are:

1. Bargaining power of suppliers:

Apple has managed a complex chain of suppliers that are spread globally over several nations including US, China, Taiwan, Japan, Brazil, Mexico and several other small and big nations. It is the large number of suppliers and potential suppliers that limits their bargaining power. Apart from that Apple products are not developed entirely by any single supplier. While one part may be supplied by a supplier in Taiwan, another by a Brazilian or the Japanese supplier and the final assembly may be completed in China.

In this way, Apple also maintains excellent control over its suppliers. While the switching costs may be very low for Apple, in case of the suppliers, they would not like losing their business with it. There is no threat of forward integration by the suppliers either. So, the brand’s position against its suppliers is strong and their bargaining power weak.

2. Bargaining Power of Customers:

While the bargaining power of individual customers in the case of Apple or its competitors is low, it is not so in the case of customer groups or markets. For example in the last few years Apple has lost a huge market share in the Asian markets in PC industry to competitors like Lenovo. So, when considering the collective bargaining power of the customers in individual markets, it is high.

Apple has tried to counter this threat by investing in R&D and by bringing new and unique products that retain its brand value and image. Still, over time while in the world market, the clout of customers has increased, that of Apple has reduced. One important factor that has worked in the favor of Apple is brand loyalty which has led to high Iphone sales. So, the bargaining power of buyers can be considered as weak to moderate.

3. Threat of New Entrants:

If the threat of new entrants has remained relatively weak for Apple, then it is primarily due to two factors. First, because the cost barriers to establishing a new technology company are very high and second, brands cannot generate Apple’s kind of brand image and recognition overnight. Still, the threat comes from the existing players. A big brand with lots of capital and good brand recognition can diversify into this area to challenge Apple’s market share.

 For example, Google has introduced its smartphones as competitors to iPhone.  While Apple products are unique and innovative, they are premium priced. This is where Samsung, LG and others have been able to take away market share from Apple. So, while the threat of new entrants in Laptops and smartphone market is low, existing tech giants can diversify into these areas. Even Amazon offers competing products like Kindle and had introduced its Fire smartphone which could not be a big success.

Apple’s brand image and brand loyalty mitigate this threat to some extent. More tech players might diversify into this area in future. So, the threat of new entrants is weak to moderate. Apple does not have much control over the raw material or distribution channels. Moreover, it has maintained its own ecosystem of products that is not linked to products or services from other brands.

4. Threat of Substitutes:                                                                                                                                                                                                                                   This threat has kept growing for Apple. It is because several brands in the smartphone market have introduced low to mid-priced models. While the brand loyalty of Apple customers is high, some of the models from Samsung and Google are a potential threat because of their efficiency and design.

 Pixels from Google and Galaxy from Samsung are major competitors of Iphone. This threat grows bigger outside the US, where Apple’s brand loyalty is comparatively lower. Apple can hardly do anything to mitigate this threat except to bring more products with great features. Overall, the threat of substitutes for Apple is moderate.

5. Competitive Rivalry between the existing players:

The level of competition between the top players in the technological industry is very high. There are several competitors of Apple in the industry including Google, Amazon, Microsoft, Lenovo, HP, Samsung and others. All these brands are engaged in intense competition where the loss of one can be the benefit of the other. Moreover, competition is a key factor affecting Apple’s performance and profits. Amazon’s Kindle is a threat to its Ipad and Google and Samsung’s smartphones to its I-phone.

HP and Lenovo compete with its laptops and PCs while Microsoft is a major competitor in operating systems. The switching costs for customers are low and all of these brands have made major investments into Research and Development.  All these factors intensify the competitive rivalry between the big technological brands. So, the level of competitive rivalry in the industry is strong.

Sources: [Suppliers]