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PORTER’S FIVE FORCES MODEL – APPLE INC GROUP MEMBERS: Tayeb Al Ali 201311295, Mohamed Al hamadi 201311483, Yosef Al Mansory

, Khaled Alnuaimi 201230311, Eissa Salem

INSTRUCTOR IN CHARGE: Ms. Sayera Mohmand

DATE OF SUBMISSION: July 8, 2014

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TABLE OF CONTENTS

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TITLE PAGE…………………………………………..…………………..…….……. (1) 1.0 Introduction to Porter’s Five Forces Model ………………………………..…….... (3) 1.1 Supplier Power 1.2 Buyer Power 1.3 Competitive Rivalry 1.4 Threat of Substitution 1.5 Threat of Entry 2.0 INTRODUCTION TO APPLE INC……………………………………..….… (5) 2.1 Threat of Entry 2.2 Threat of Rivalry 2.3 Threat of Substitutes 2.4 Threat of Suppliers 2.5 Threat of Buyers 3.0 SUMMARY…………………………………. (12) 4.0 REFERENCES…………….……………...………….. (13)

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PORTER’S FIVE FORCES MODEL – APPLE INC. 1.0.

Porter’s Five Forces Model:

The Porter's Five Forces tool is a simple but powerful tool for understanding where power lies in a business situation. This is useful, because it helps you understand both the strength of your current competitive position, and the strength of a position you're considering moving into. Porter’s five forces model helps in accessing where the power lies in a business situation. Porter’s Model is actually a business strategy tool that helps in analyzing the attractiveness in an industry structure. It let you access current strength of your competitive position and the strength of the position that you are planning to attain. Porters Model is considered an important part of planning tool set. When you’re clear about where the power lies, you can take advantage of your strengths and can improve the weaknesses and can compete efficiently and effectively.With a clear understanding of where power lies, you can take fair advantage of a situation of strength, improve a situation of weakness, and avoid taking wrong steps. This makes it an important part of your planning toolkit. Conventionally, the tool is used to identify whether new products, services or businesses have the potential to be profitable. However it can be very illuminating when used to understand the balance of power in other situations. Five Forces Analysis assumes that there are five important forces that determine competitive power in a business situation namely Supplier Power, Buyer Power, Competitive Rivalry, Threat of Substitution and Threat of New Entry. 1.1 Supplier Power: Here you assess how easy it is for suppliers to drive up prices. This is driven by the number of suppliers of each key input, the uniqueness of their product or service, their strength and control

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over you, the cost of switching from one to another, and so on. The fewer the supplier choices you have, and the more you need suppliers' help, the more powerful your suppliers are. 1.2 Buyer Power: Here you ask yourself how easy it is for buyers to drive prices down. Again, this is driven by the number of buyers, the importance of each individual buyer to your business, the cost to them of switching from your products and services to those of someone else, and so on. If you deal with few, powerful buyers, then they are often able to dictate terms to you. 1.3 Competitive Rivalry: What is important here is the number and capability of your competitors. If you have many competitors, and they offer equally attractive products and services, then you'll most likely have little power in the situation, because suppliers and buyers will go elsewhere if they don't get a good deal from you. On the other hand, if no-one else can do what you do, then you can often have tremendous strength. 1.4 Threat of Substitution: This is affected by the ability of your customers to find a different way of doing what you do – for example, if you supply a unique software product that automates an important process, people may substitute by doing the process manually or by outsourcing it. If substitution is easy and substitution is viable, then this weakens your power. 1.5 Threat of New Entry: Power is also affected by the ability of people to enter your market. If it costs little in time or money to enter your market and compete effectively, if there are few economies of scale in place, 4

or if you have little protection for your key technologies, then new competitors can quickly enter your market and weaken your position. If you have strong and durable barriers to entry, then you can preserve a favorable position and take fair advantage of it. Further to this report, we would now apply the same model for Apple. Inc. 2.0. Introduction to Apple Inc. Apple is probably the most well-known company when it comes to the making of technology that is cutting edge and something that everyone wants to have in their possession. Apple Computer first came to be a company in 1976 when Steve Jobs and Steve Wozniak when they released the Apple I and was located in Cupertino, California. These two young men dropped out of college, and were often viewed as outcasts in most of the places that they were at, including schools, which could have been the reason that they dropped out of college. As most people have heard, Apple really started in the basement or garage, depending on who the person talks to rather than at some expensive business location. Which is perhaps the reason so many people were first intrigued by the brand and could be the reason that the computers were such a success, they were created by guys that knew what they wanted and passed this on to the rest of the world. And what they wanted was something that other people wanted as well. Until the nineties, the company produced some of the best personal computers that could be found on the market, including the Apple brand, Macintosh and Power Mac computers. However, they saw a downfall in their sales after nineties as the competition began to increase and the company was then trying to figure out what to do differently to keep their company running. The year 2001 was a banner year for the company since this was the year that they

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introduced the Apple iPod, which is one of those devices that have many other companies copying, though none can be as good as the original. The first order that the two built is somewhat of an amazing feat that was the beginning of the company. After being introduced to one another, they made a working model of their computer and took it to a nearby computer store in order to try to make it onto the market. The owners of the store ordered fifty of the machine that was to be fully assembled and ready to go, which seemed to be an impossible feat. However, they did succeed as they bartered and promised many IOU's to companies to get the parts that they would need since they had no money to buy these on their own. They finished all fifty machines in thirty days and took them to the store to sell, which they received around five hundred dollars apiece for these machines. They were a hit with those that came to the store. The company continued to stay on top of their game and improve upon their technology; they produced such things as the iMac, which really did help to propel the company in the eyes of many consumers. Now, Apple is a brand that most people automatically know all over the world. They are known for their innovative technology that is usually the first of its kind on the market and something that all people love to own and make their lives a bit easier with the advancements that they gave people. This clearly explains how Apple Inc. started from a little garage and rose to fame as one of the most dominant cell providers in the economy. But being dominant also means that Apple has suffered from competition, new entries and all the other challenges. mong the different choices, Apple has chosen the differentiation focus strategy in the broad industry. The invention and development of products by Apple are its highly unique attributes, with devices such as the

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iPhone, iPod and iPad where the use touch screen and other interfaces to operate the products. Apple spends billions of dollars every year on R&D (Research and Development) to develop and promote its products in order to achieve superior quality over competitors’ products. Apple slogan is ‘Think Different’, which drives them to innovate and provide high quality regarding their products. Apple’s markets are global, but they are focusing on active markets such as America, the EU and some Asian countries. However, Apple focuses on a market segment where customers clearly feel that Apple provides value for its customers. In addition, Apple had a positive growth rate during the economic crisis of 2007-2009 (Business week, 2010). Apple’s premium price strategy and its success has become a significant barrier to competitors such as Nokia, Motorola, HTC and the E-book by Sony. Further, we would now see how Apple does justice to five forces model of Porter, which were discussed earlier in this paper. The Five Forces Model is a commonly used model in Strategic Management for purposes of analyzing how the ability of a firm to generate or maintain a competitive advantage. Porter’s Five Forces analysed the external environment of the industry in order to give a better understanding of the strengths and weaknesses within the organization. These analyses give the company the ability to identify the opportunities and threats from external factors. The five forces in the model include 2.1 Threat of entry: Let's begin with the threat of entry. It is a widely known fact that Apple essentially dominates the consumer electronics industry. In this particular force, consider the relentless effort that Apple puts forth into R&D. Each and every one of the company's products is very unique, even with respect to competitors, justifying that Apple has a very unique product offering. For each of

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its product lines, Apple, like any other company, faces rigorous competition. This high-tech industry requires continual research and development (R&D). This sector is difficult for new companies to enter because new entrants must spend a large amount of capital on R&D and on the advertising and promotion of their brand. There are some dominant producers in this sector such as Apple, Microsoft, Dell and Sony, who share the majority of the market. Apple should be aware of new entrants because they may come up with surprisingly better technology or a better product. However, these new entrants are less of a threat because it is difficult to enter and penetrate

the

market

in

a

limited

time

The threat of entry is relatively low, due to the fact that Apple has found a way to continuously differentiate its products from its rivals. Apple also has such wide-spread production that it can produce at a lower cost due to its economies of scale. These reasons all contribute to Apple's dominance in the industry with respect to new market entrants. 2.2 Threat of rivalry: Apple also does not have to worry too much about the threat of rivals. This was not the case prior to the introduction of the iPod and iPhone. The competition in this industry is very high, almost in all areas of business, because of the continuing requirement to provide new products all the time. Competitive prices, new products, design innovations and technology are the main factors that Apple has to compete with other international companies on, such as IBM, HP, Acer and Dell. The consumers’ choices also differ; some prefer to save some cash rather purchase high performance specification technology and some prefer the newest technology. So, the result is that companies implement different strategies; for example, low-cost and best-cost strategies. Some manufacturers offer products at the lowest price in an attempt to cut their costs by ignoring everything except some basic features. Some other companies in the middle price range, such as 8

Dell and HP, focus on attracting customers by offering varying prices. And the top of the range companies, like Apple, gain customers through their high quality products, features and innovative design, which makes their products popular all over the world. Before the iPod and iPhone came along, most organizations within the consumer electronics industry put forth relentless efforts of R&D in order to introduce a product that was both new to the market and very unique. The problem for most organizations in this industry is that Apple had the most success with this before other firms. Once Apple introduced the iPad and iPhone, it quickly rose to the top and gained the advantage on rivals such as Samsung. Of course, it didn't stop there for Apple, as the company continuously innovated and introduced new products to the market. This is a good transition point into the third force, the threat of substitutes. 2.3 Threat of substitutes: It is evident that a simple smart phone could be viewed as a substitute to the iPhone, a simple mp3 player to the iPod, and a Samsung tablet to the iPad. The technological environment is changing fast every day. There are not many substitutes in this industry because of the high-tech features. However, alternatives are always available from competitors. If some other companies such as BlackBerry, Google, Samsung or Microsoft come up with new technology or the same kind of phone at a lower price or with more features at the same price, then this is a problem for Apple. Customers usually tend to look to the latest technology instead of traditional methods. Apple has the ability and efficiently to design and develop its own hardware and application software to become unique and distinct from its competitors. If these goods are available, then how is it that Apple dominates in such great fashion? To provide two simple reasons, the company has achieved economies of scale, enabling it to produce at a lower cost, and Apple simply markets better than its competition. Apple's brand equity and brand recognition is so high 9

and well known that it further establishes an advantage over its substitute competitors. It is true that there are substitutes readily available, but Apple has done such a phenomenal job marketing its products that its customer base perceives its products to possess superior benefits and superior value to that of its competitors. In other words, Apple has created more economic value for its products than its competitors. 2.4 Threat of powerful suppliers: The threat of suppliers is also not so severe. Considering that there are many organizations operating in the consumer electronics industry, organizations tend to be more elastic with respect to suppliers. If a given supplier were to increase its prices, an organization would likely seek out an alternative supplier, since there are so many firms within the industry. It must be noted, however, that suppliers in this industry due have some power with respect to what they are supplying. The fact that the suppliers are supplying unique and highly differentiated materials is what gives them such power. Their ability to supply such unique and differentiated materials gives the suppliers some bargaining power. But it also states that the bargaining power of suppliers imposes a threat to any company. It also includes, the availability of substitute suppliers which is an important factor in determining the power of the supplier. Suppliers are known as third parties in this industry, and they are classified in two groups. The first group makes the major parts for the products. This group is not strong because of the availability and easy of replacing the items they make, such as batteries, wire connections, screens and other internal components. In contrast, the second group provides accurate parts and important programmes such as flash-memory and DRAM. This group is strong because of their specialized and advanced products, as well as the lack of alternative products (Nistor, 2010).

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There are some suppliers who dominate the market; for example, Intel, Microsoft and Sony. So, it is important for Apple to have a good relationship with its suppliers. 2.5 Threat of powerful buyers: The final force, the threat of buyers, is really no threat to Apple. For starters, Apple has millions of buyers, some of which are large corporations. Secondly, Apples products are both unique and differentiated; illustrating the power of buyers is lower. In this case, Apple does have the ability to increase its prices on some of its products because of the unique product offering and due to the fact that the majority of its products are well differentiated from the competition. It is important, however, for Apple to ensure that the price increase is not too drastic. Should this be the case, some consumers may begin seeking the inferior alternatives. So it is necessary to ensure that any price increase will not cause any kind of mass terror. Sometimes, the buyer’s bargaining power is very high in the industry because competitors offer a wide range of similar products with competitive prices. The Apple Corporation faces a moderate threat from buyers because they have a lot of products that consumers can choose from. In addition, the threat of buyers comes from their demand for new features in Apple products. However, there are a large number of companies that offer similar products and there is quite a big differentiation in price and performance. Therefore, loyalty is often shown towards a specific brand because there are not many differences in the quality and price between brands. Buyers are often more sensitive to brand rather than price. Apple’s customers are individuals, education departments, enterprises, governments and creative customers. So, the variety of consumers and their needs has a direct impact

on

Apple’s

future

strategies

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3.0 Summary: In conclusion, we have seen a detailed analysis as to how when Porter’s five forces are applied to Apple Inc. how it affects it in every aspect. These external forces yet, do not have much of an effect on Apple, because of its dominance and huge market share. Competitors such as Nokia, Samsung, Mircromax, HTC, LG etc. also face the same, but their effect is different from that of Apple. Porter’s this model is amazingly helpful for any organization as it helps to provide a substantial analysis over a company’s threat of new entry, buyers, suppliers, competition and substitutes. This is still a brief analysis of Apple Company. A much larger Five Forces analysis of Apple can be conducted. Such an analysis could prove to be quite lengthy, especially considering the implications it has on a firm’s competitive stance. It is obvious that Apple has such a strong position in its market from these Five Forces. Then again, it helps a little when you have a creatively superior marketing department guiding the way.

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6.0 References: [ CITATION Qui99 \l 1033 ] QuickMBA. (1999, June 2). Porter's Five Forces. Retrieved June 2, 2014, from www.quickmba.com: http://www.quickmba.com/strategy/porter.shtml

[ CITATION Min14 \l 1033 ] Mind Tools LTD. (2014, June 3). Porter's Five Forces. Retrieved July 2, 2014, from http://www.mindtools.com/: http://www.mindtools.com/pages/article/newTMC_08.htm

[ CITATION Ale13 \l 1033 ] Lloyd, A. (2013, February 4). Apple and the Five Forces Model. Retrieved July 3, 2014, from loyd7160.blogspot.ae: http://lloyd7160.blogspot.ae/2013/02/apple-and-five-forces-model.html

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