Apple Analysis Part 1 Title Page
October 13th, 2018
San Francisco State University
This paper introduces the extensive analysis of Apple in regard to the strengths, weaknesses, and potential opportunities Apple possesses. Apple is a multinational corporation that is involved in the research, design, and manufacturing of personal computers, consumer electronics, and computer software. Apple produces many different variations of their personal computers in the form of desktops and laptops. Additionally, Apple produces various smartphones and tablet devices as well as wearable technologies like the Apple Watch. Apple's resources are significant. Financially, they are at the top of each of the industries they compete in, whether its personal computers or smartphones. One of their most powerful resources is their people. This gives them the unique ability to be one of the most innovative companies in the sector which allows them to be able to keep introducing market leading technologies every year. Apple's core competencies can best be summarized within three areas; Design, Hardware/Software Integration, and Research and Development. Each of these areas are where Apple excels and where they are hyper-focused on creating the best product. These core competencies provide numerous capabilities for Apple. They are able to remain ahead of the competition due to their innovative ecosystem of software and hardware products.
While Trump's China tariffs are hitting many industries with manufacturing in China, Tim Cook has been personally discussing the issue with Trump and appears to have even managed to get exceptions made for the “wireless tracker” category that would include much of its “Other” revenue(Apple Watch and accessories). Additionally, in China, Apple's market share recently fell 12.5% around the same time the government began shutting down unlicensed Apple stores, mostly losing to Chinese competitors Huawei and Xiaomi, as well as Samsung. China has a strong political preference for their domestic companies, and Apple might not be able to adequately lobby the government for more intellectual property protections, especially given the company's stance on privacy which strongly contradicts the government's.
As a “premium” smartphone, Apple mostly benefits from stable markets with demand for luxury goods. As emerging markets develop, the smartphone market is expected to grow tremendously, with China and India each already surpassing the US as the largest national markets, though this growth is slowing as the market matures. Most of these markets are dominated by cheaper smartphones, often with more functionality within the local market as well. With over 60% of its revenue coming from outside of the US, a weaker dollar would also translate to higher returns at home. Simultaneously, they rely on production costs remaining low in China, which is very slowly modernizing and is expected to see rises in working standards and related labor costs.
With year over year sales slowing among the entire smartphone industry, it would appear consumers do not feel the need to keep with trends as strongly or are not placing as strong of a brand premium on the Apple brand. Within developing markets, even if a big enough premium market exists within the market as a whole, even this premium market seems to prefer competitors with more varied offerings rather than a “premium” brand, even viewing the markup negatively. The growing demand for a “connected” luxury electric car has also created an opportunity for Apple to enter the car market similarly to Tesla(it is an open secret they are developing one, poaching employees from Tesla and other car companies, with expectations to be unveiled in 2021).
The impending release of 5G, which would require users to purchase a new phone to use, may spur sales, though there might not be enough of a demand for those speeds at the time of launch, as there as with the launch of 4G. Cell phone service providers are more motivated to encourage adoption though and may provide discounts on flagship phones to encourage upgrading(which would reduce their existing network costs, as well as start paying off their investment in 5G).
An industry-wide problem affecting the entire world is the recycling of electronics containing rare earth minerals, often done simply by burning the older products to melt them. Apple has announced a program that intends to end mining altogether, relying more and more on recycled materials. While the environmental impact of mining is reduced, the pollution created by recycling, both the kind unique to electronics as well as the additional energy costs required for all recycling, means it might not be the most sustainable plan after all.
The EU(and to a smaller degree the US) are both showing more interest in reigning in large companies' tax benefits, including the EU ordering Apple to pay Ireland ~$15B in back taxes. Apple intends to appeal, but it is likely the EU will retain its position.
Threat of New Entrants - Low
The threat of new entrants to the marketplace are weak due to two primary factors. There is a substantial cost of capital requirements to compete with any of the top market leaders creating a significant barrier. Additionally the high cost of brand development, which Apple has developed over many years, is nearly impossible to replicate in the short term.
However, Apple needs to be both ahead of the new technology arising, and cost sensitive to the consumers who are not looking to spend money on the premium priced devices or services Apple has to offer.
Threat of substitutes - Low
The threat of substitutes is relatively weak because although there are similar products with similar features, none can precisely match their products. The substitute for cellular phone or the smart watches or laptops are old fashioned telephone, watches or desktops or cameras. All of these don't stand a chance against the innovation, accessibility, style and convenience of the apple products.
Power of Suppliers - Weak
Although there are a few critical products that are only offered by a limited number of suppliers, the majority of products they require are available from hundreds of providers around the globe. The switching cost is low and not a significant problem for the company. Although there are many different suppliers, they do engage in inventory prepayments at negotiated prices(Investopedia). They also partner with their suppliers to offer programs that provide education and advancement opportunities to their employees. Apple has a strong set of suppliers dedicated to their company due to good morality and employer incentives that apple is known for having. Because of this, it wouldn't be hard to find new suppliers if need-be.
Power of Buyers – Strong
Apple's markets are primarily in the United States, Europe, and China, but are expanding at rapid rates. Their end consumers collectively have a strong bargaining position, primarily due to the low cost of switching to a competitor. They can easily change brands and have accessibility to very similar products from those brands. Consumer trends primarily drive the industry as a whole and a demand for additional features and enhanced components remain and the forefront of consumers' minds. Price of devices have a relatively low sensitivity as Apple is often the highest priced option amongst its competitors.
Competitive Rivalry - High
The competitive rivalry for Apple is strong, and the technology industry is extremely aggressive. The market is so competitive that “some of the Company's current and potential competitors have substantial resources and may be able to provide such products and services at little or no profit or even at a loss to compete with the Company's offerings” (SEC FILING). Such aggressiveness is shown through their advertising, design imitation, and rapid innovation. Apple directly competes with other technology companies such as Samsung and Google, who are lowering the switching cost from Apple to their less expensive devices, with similar design and features.
Strategic Group Map
We tried comparing different models of smartphones (Blackberry, Apple, LG, and Motorola) at the site called Smartprix.The comparison is shown in Appendix 1. This website used specs score to show the features of the devices. It is generally considered that highest features of a phone call for more price but from the comparison below we found out that LG G7 plus has the highest spec score but still price lower than Apple iPhone XS. So, from this it is concluded that features only itself doesn't play a vital role, it is the quality and also the brand name that plays a role. The more reliable and versatile an operating system is the more quality applications and features it can support and run. Apple iOS is the operating system that makes it unique and reliable as compared to other mobile software's. The ease of use, thousands of supporting applications and the latest unique features iOS a competitive advantage that none of the other software's enjoy. The IJIRCCE compares operating software like Apple iOS, Google Android system, and Microsoft as shown in appendix 2.
The comparison of the systems clearly shows that Android and iOS are closest to each other with the highest number of the app as compared to windows and blackberry. Open availability, as well as easiness to interfere, is what makes Android more vulnerable than iOS. iOS quality is further supported by the exclusive hardware design by Apple and the latest technology like Apple Pay and facial recognition. On the other side Windows and Blackberry are way behind in these most demanded criteria. On the basis of this information, we have reached the following conclusion; that Apple is on the top right side of the market with high quality and therefore high price while other companies are still trying.The gap/line between Apple and other companies is because of research, latest technology, innovation and proactive approach; which acts as a barrier and makes it difficult for the current and future firms to move towards Apple(Appendix 3).
Apple's success story is a result of its strength. Pioneer in the field of touchscreen iPhone, Apple has the following strengths.
i) Innovation: we can say its brand ambassador of Apple. Every new product brings a new idea to the market. Ease of use. Apple got popularity because of its easy to use interface and to this day all the companies are following Apple's graphical icon as an interface.
ii) Brand name. Apple has turned into a brand worth 170 billion dollars according to Forbes as mentioned in the article written by Jurevicius.
iii)Diverse Product line: Apple has its own successful hardware, Software, and technical services line which its competitors like Samsung and Google don't have.
iv) Research and technology/Leadership. These strengths are building a foundation of Apple and Apple still uses these strengths to overcome the threat of rivalry, loss of sales, loss of market share or lack of quality or risk of losing customers.
v)Economic growth. Apple has become into a giant revenue producer it made around 48 billion as profit and about 229 billion as revenue in the year 2017 according to Jurevicius article.
vi) Environmental responsibility. Apple claims to be gone 100% green with 0% waste from its 22 plants and strives to make its supplier comply with environment-friendly practices.
It's very difficult to find a weakness in a leading company but some of the factors that Apple needs to address lower prices and limited distribution network; according to a study conducted by Panmore institute. As Apple products are expensive so only limited people can have it, that leaves out a wide area of the market. Its limited distribution channel also makes the product difficult to get in countries other than the USA or Europe or Canada.
The weakness of Apple is actually it's inability to grow in a wide market and to increase its sale by reducing its prices. Apple is very easily available in the western market but in eastern countries, it is a luxury that only certain class can afford. Although many Apple plants are in China and other undeveloped countries, there is still a wide area of the market uncaptured. But there is one more thing that needs to assessed first and that is a balance of supply and demand to keep the products desirable and at a fair price.
The threat to Apple is mainly from its competitors that they might get an edge in the market by developing more innovative and quality products than Apple. Apple can easily overcome these threats and hold and increase its market share by wide variety of successful products like iPhone, Mac laptops, and iOS software along after services and hundreds of app. By using its strength Apple can overcome the risk of losing customers to low selling price of the competitor's products. Apple needs to use its technology to develop innovative, stylish and durable products at lower cost and selling price.
Apple's sustained competitive advantages come mainly from its high margins, which it's able to charge due to its world-class design, consistent innovation and ingenious marketing campaigns which allows it to become the most valuable brand in the world. This lead to a demand steadily higher than Apple's capacity, even when they were the market-leaders in units sold, putting them at a uniquely advantaged position when it comes to buying power, combined with the threat of vertical integration, into an already very integrated supply chain, as well as an integrated product ecosystem. This all translates to their unparalleled liquidity, allowing them to expand in any of these directions as needed, as well as the ability to acquire innovative features, competitors, and their own stock.
As one of the few trillion dollars companies in the world, it would be hard to overstate their value, with an estimated 18% being represented by their brand alone, another 20+% in cash, and another $226B in stock buybacks during the last decade. Additionally, while only capturing 18% of unit sales, they are estimated to capture 87% of the profits made in the smartphone market. Even the network effects of its unified ecosystem might have been underestimated for years, as a recent Google post shows there are “only” 2B active, connected Android devices. This would mean Apple's share of the smartphone market is actually about 65% - 230% bigger than estimated when excluding Android devices with no cellular connections and/or that are no longer used.
While Apple's scale is only somewhat unique, its margins at those levels absolutely are. Once the subject of a small patent-spat between Apple and Samsung, Apple's designs are still to be envied, though they have begun to copy more features, both design and functional, from its competition(namely Samsung). While their brand is usually considered most valuable, it was neck and neck with Google for a while. Apple has already been moving to not only design its own chips to avoid paying Qualcomm but has already achieved parity with the industry leaders and are rumored to have contracted with their Chinese manufacturers to manufacture their complete system on a chip solution. This combines well with their growing “ecosystem” of devices and services, which while rivaled by Amazon, Google, and Samsung in different ways, none combine hardware, software, and after sale services to produce the margins Apple does.
Its two nearest competitors, Samsung and Google, “only” hold $60B and ~$100B(as of the previous quarter) in cash, respectively, and they are not situated to increase that at a faster rate than Apple any time soon. While Apple's stores produce record per-store sales, even in unauthorized stores, their success in retail has to lead to Samsung and Microsoft to follow suit, with Samsung opting to rent within Best Buys for the most part. While technically imitating their venture into retail, none have managed to leverage their brands and integrated products and services so completely. However, neither these literal imitators nor the competition has been able to imitate Apple's software ecosystem themselves, or even the software designs, due partly to being so closely integrated with the official hardware.
Organized to capture value
Even if a competitor could produce a product that to the consumer was identical in every way, they would almost certainly not be able to charge the same prices, which is to say the same margins that keep Apple capturing the majority of the value in the industry. Additionally, while often criticized for keeping cash reserves so high(partly due to tax laws that have since changed), they have been using their capital wisely, to expand into new markets like watches, home assistants, a (somewhat failed) attempt at TV that is still going, and most promising, automotive.
Apple has spent significant amounts of money on research and development of their products. This has allowed them to create some of the most competitive products in the personal electronics market. While they remain a leader in this market, there are other industries that Apple has not yet become fully involved in or lacks a majority market share. Technology for automobiles is one area where Apple's increased investments in research and development will allow them to leverage their proprietary hardware and software into automobiles. A current application of this idea is Apple CarPlay which allows nearly all Apple products to seamlessly connect to the navigation system of supported auto manufacturers. Apple can take this idea further by potentially incorporating their hardware in to vehicles or offering an increased range of software products to integrate with new vehicles. To do this Apple must create additional strategic partnerships with automakers.
Given that more of Apple's business comes from existing customers upgrading their phones(as opposed to stealing customers from Android and feature-phones), they are constantly mining more materials to satisfy the same customers. An industry wide problem affecting the entire world is the recycling of electronics containing rare earth minerals, with much of it being done in China and other developing economies. This is often done simply by burning the older products to melt them. Apple has announced a program that intends to end mining altogether, relying more and more on recycled materials. While the environmental impact of mining is reduced, the pollution created by recycling, both the kind unique to electronics as well as the additional energy costs required for all recycling, means it might not be the most sustainable plan after all. As China slowly modernizes, it is accepting fewer types of recycling as well, likely increasing costs. An opportunity to increase sustainability by creating products that are used longer exists, but would be expected to hurt sales too much, leading Apple to actively lobby against their customers' ability to repair their own phones(also forcing more to subscribe to AppleCare).
According to Verto Watch data from January 2018, Apple still leads the highest number of market share, having 45%. Samsung, behind Apple, claims 33%. (Hwong, 2018). These two companies are still dominating the smartphone industry. Although Apple is consistently giving consumers a reason to buy their new products, the high cost of these products is detouring them to purchase other companies' products. Apple is known for their innovative and sleek designs, but Samsung has also been able to reveal new products, such as their Galaxy S9, which was the same size as Apple's iPhone X model. Samsung has also adjusted their models such as dust and water-resistant capacity, just like Apple. Samsung is close being Apple with their product development. The prices of those competitors' devices are also significantly lower than Apple's. For example, the new iPhone X's cheapest model is priced at (£999, AU$1,579). With Samsung's Galaxy S9 starting at $720 (£739, AU$1,199) for the S9 and $840 (£869, AU$1,349). (Orellana, 2018). Apple can tackle this issue by creating economies of scale, lowering their fixed cost. Having new entrants in the technology industry pushes Apple to become more innovative, thus creating more advanced and unique products.
The competitive rivalry for Apple is strong, and the technology industry is extremely aggressive. Such aggressiveness is shown through their advertising, design imitation, and rapid innovation. Apple directly competes with other technology companies such as Samsung and Google. Samsung and Google have created a low switching cost from Apple to their devices, which makes higher competition. This means it is easier for customers to switch from wanting a more expensive device, to a less expensive device with similar design and features. Cellphones and tablets are not the only devices rivals are competing with. Apple is also competing with companies such as Dell, HP, and Sony, who have made a strong influence on consumers. All these competitors are spending tons of money on advertisements and R&D.
The following map has been taken from the presentation of Mariham Helal and EsraaElseidy to support our paper.
Resource / Capability Valuable Rare Imitation cost Organized
Cash Y Y Y Y/N
Retail presence Y Y Y/N Y
Vertical Integration/ Ecosystem Y Y N Y
Design Y Y N Y
Brand/Marketing Y Y N Y
R&D/Existing Patents Y Y N Y
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