Analysis of Apple’s Industry

Apple Computers, Inc was founded on April 1, 1976, by Steve Jobs and Steve Wozniak. The Apple I was their first computer, about 200 units were produced from April 1976 to September 1977. For the time, it was considered a huge success. Its successor the Apple II debut in April of 1977. It was a ground-breaking machine, producing the first ever color graphics. The personal computer revolution propelled Apple forward and it was one of the fastest growing companies in the late 70s. In December 1980, Apple went public with its initial offering selling out in minutes.

Wozniak left Apple in 1983 and Jobs left in 1985. Apple continued to improve its computers and did well through the rest of the 80s. The 90s for Apple were turbulent times of mismanagement, bad decisions and financial losses mounted. Industry experts thought Apple fail.

In 1996, Apple’s need for a operating system caused it to buy NeXT Software, owned and founded by Steve Jobs when he left Apple. In 1997, Steve Jobs stepped back in his old role as interim CEO and began making changes to bring Apple back to its core. He eliminated licensing agreements and 15 of the 19 products the company was making at the time. Jobs turned Apples focus back to desktops and laptops. Their line-up was expensive, so Jobs introduced the iMac for a lower priced consumer model. It was widely popular. Jobs had successfully turned Apple around by paring the company down to what it was best at, personal computers. In less than three years, Apple’s stock had recovered, its future was looking great and Steve Jobs was the official CEO again.

In 2001, Apple again introduced a revolutionary product to the market, the iPod. The portable music player represented everything Apple was great at, an elegant and functional product. The iPod was the most wanted consumer electronic item of the first half of the decade. Apple expanded the iPod product line and each iteration was even more successful. Apple introduced different sizes in both physical and storage size, and a debuted a video version 2005. By 2005, when the video iPod game to fruition, 35 percent of Apple’s revenue came from iPods. The introduction of the iPod also brought the introduction of iTunes in 2003. This marked the true digital revolution of music, combining digital download integration with the iPod. By 2010, iTunes was the largest music seller. In 2006, Apple began using Intel chips in their computers. They transitioned their entire line in less than a year, exclusively using Intel chips. Along with the change to Intel they also introduced software that allowed Macs to run Windows alongside the Mac OS.

In 2007, Steve Jobs announced that Apple Computers, Inc was being coming Apple, Inc because its focus was not solely on personal computers. 2007 also marked the sale of the first iPhone. A device that would change the world as we know it. In 2008, Apple launched its app store to supply applications for its iPhone. By the end of 2008, Apple was the third largest cell phone provider in the world. In 2010, Apple introduced the iPad. The introduction of the iPad introduced a new class of computing, not a laptop and not a phone, something in between and wildly popular. By mid-2010 Apple surpassed the market cap of Microsoft. 2010 also brought the latest version of the iPhone, bringing with it video calling – facetime. In 2011, Apple would introduce iCloud, an online method to sync storage between Apple devices. In August 2011, Steve Jobs would resign with Tim Cook replacing him. In 2012, Apple introduced Siri, an intelligent software assistant, and their Retina displays. In August 2012, Apple market capitalization set a world record at $624 million. In 2013, Apple filed patents for an augmented reality system. Apple has continued to refine its offerings of computers, iPhones and iPads. In 2016, Apple announced that it has over 1 billion active devices in use. In 2017, Apple introduced their HomePod, a Siri integrated smart device for home use. In 2018, Apple acquired Akonia Holographics for its augmented reality technology. Apple ranked #4 on Fortune 500 list for 2017 and closed out 2018 with $265 billion in revenue.

What is the Nature of Apple’s Business?

The nature of Apple’s business can be best summed up by its mission statement:

Apple designs Macs, the best personal computers in the world, along with OS X, iLife, iWork and professional software. Apple leads the digital music revolution with its iPods and iTunes online store. Apple has reinvented the mobile phone with its revolutionary iPhone and App store, and is defining the future of mobile media and computing devices with iPad.

Apple is in the business of selling consumer and business electronics through retail and online stores. It focuses on high quality devices driven by differentiation and status. Apple’s business of developing and maintain the software that the devices use as operating systems is critical. It is this software that allows the Apple ecosystem of devices to seamlessly integrate with one another. Apple may not “sell” software, for the most part, because each device comes with the operating system needed to function, it does sell a seamless, no-stress ecosystem. Apple also sells digital content and applications through its online stores. That said, Apples main business is selling hardware, mainly phones. The iPhone accounted for $141,319 million out of their $229,234 sales, or 61.6 percent of their net sales. The iPad accounted for 8.4%, the Mac 11.3 percent, other Apple products 5.6 percent and services 13.1 percent. While services are the largest net sales category outside of the iPhone, the hardware Apples sells (iPhone, iPad, Mac) accounts for 81.3 percent of its net sales.

Analysis of Apple’s Industry and Potential Profitability

Porter’s Five Forces Model will be used to analyze Apple’s position within its industry. Apple’s industry is technology – computer hardware and software. It is one of the biggest companies in the world and competes many companies big and small. Its main products are phones, computer, tablets and software, forcing it to compete in wide and varied markets. Focus of Porter’s Five forces model will focus on its physical products and mainly phones, given those are its primary sources of revenue.

Threat of New Entrants – Moderate

Economies of scale – A true new electronics contender is slim it does happen. In 2014 a new company called OnePlus entered the cellphone arena. OnePlus was original distributed through an online invite system, then online only, and now is even available through T-Mobile stores. Thus, proving that an upstart with sufficient online support can gain traction in the market. Apple’s main threat of entry is in established electronic makers deciding they want to enter into the electronics category they sell in, whether it is phones, computers or tablets. Google has done such in recent years with its Pixel line of phones, and the giant Samsung was also once a new entrant.

Network effects – Apple has a high network effect that reduces the threat of entry with their iPhone. The biggest network effect is the social value of the iPhone. Considered elite status, Apple make it apparent to other iPhone users if you are using an iPhone. Messages sent and received via iMessage, Apple’s messaging service, are blue, while regular messages sent via traditional means are green. Purposeful or not, this lets other iPhone users know if the other user has an iPhone. In a world of consumerism, image is everything and Apple lets Apple users know who is in their world.

Customer switching costs – Overall financial switching costs are low. If you switch phone brands to something outside of Apple all you might need to buy is different charge. The real cost of switching one device out of Apples ecosystem is the loss of the seamless integration between devices. Apple products are not known for communicating well with non-Apple products. If you have a Mac, iPod, iPod and iPhone, the likelihood of switching out one of those for a non-Apple brand is low.

Capital requirements – Similar to the economies of scale story, while capital is requirement are high, it is doable to get into the electronics area if played right. There is always the option of developing the tech and outsourcing the making of and labor costs associated with producing the products.

Advantages independent of size – Apples biggest advantage independent of its size is its brands differentiation and reputation. Its market is premium devices for premium people. Apple’s reputation and brand loyalty is one of the reasons it can charge a premium for devices.

Government Policy – If anything Apple has the upper hand on government policy. States and cities will fight for Apple to come into their area, making concessions on taxes and other policies to lure Apple in. In 2017, began exploring the idea of assembling iPhones in India, in part to avoid high tariffs, but India balked at the high demands Apple set forth. A deal was negotiated though because Apple started producing iPhones there in 2017, expanded operations in 2018 and is set to further expand them in 2019.

Threat of Suppliers – Weak

Apples uses a great many suppliers. While the iPhone is designed in the United States, its components are made outside Apple by many, many manufactures. Apple has the power to choose from different manufactures for each of its components. There are also only a few big firms that are buying from many suppliers, so they have a better position. Apple’s switching cost from one supplier to another is low, as Apple has no vested interest in these companies other than contracts they may have. Apple has an advantage in that aspect. Apple is usually a major buyer of whatever component Apple is buying from that supplier, which strengths Apple’s position as suppliers will not want to lose their dealing with Apple. Apple also poses a credible threat of backward integration. This is already happening. Apple is currently taking the first steps towards manufacturing its own screens. Apple is also replacing Intel chips with their own chips starting in 2020. Backward integration is a real threat from Apple as they look to control every aspect of the process concerning the iPhone.

Power of Buyers – Low

The power to buyers against Apple is low. While the cost of switching hardware is relatively inexpensive the cost of leaving the Apple ecosystem is extraordinarily high, especially the longer you have been in it. Everything Apple is integrated with each other through iOS and iCloud. Software and music that is bought through Apple will not work outside Apple, unlike if you own a Dell and buy a Acer, you can reinstall your software on your new computer. The opposite would not be true, going from Apple to Dell would create all sorts of problems. Additionally, everything uploaded to iCloud, music, photos, videos, etc, would instantly become inaccessible with equipment outside of the Apple ecosystem. Once you buy in, the switching costs are enormous. Another factor is the prestige within the community, Apple users are fiercely loyal to their ecosystem. Individual buying power is also low, the loss of one customer means nothing to them. Apple’s strength lies in brand loyalty to keep the chance of a mass exodus form the Apple brand low.

Threat of Substitutes – low

Threat of substitutes by Porter’s model means something that could take the phones place, not a competing brand replacement. Their phones specifically replace land lines, cameras, pagers, video game systems and possibly even computers. A phone is all those rolled into one. A possible threat of substitute for Apple would be if some technology down the road gave better integration and connectivity than their iPhone or computers could. Possibly some augmented reality or virtual reality technology could upset their ecosystem, but the remains to be seen, especially as Apple itself is researching and buying companies in this area.

Rivalry Among Existing Competitors – fierce

Firm competition would fall into the monopolistic competition category. There are many firms, with differentiated products, some obstacles to entry and the ability to raise prices for unique products. Apple has phones that complete in almost all price ranges, with current prices on the low-end iPhone 7 going for $449 all the way up to $1449 for the iPhones XS Max. This opens up competition some level from most manufactures. Samsung has the Galaxy and Note for premium competition and Google has its Nexus line. Outside the United States Apple competes with local country brands both in Europe and Asia. For computers Apple is competing against Dell, Lenovo, HP, and Microsoft to name a few. Apple sells their products based on differentiation and should continue to do so. They need to continue to innovate technology to keep ahead of the competition.

Apple’s Current (2019) Strategic Plan

In the short-term Apple will continue to focus on content, in their case their operating system and user interface. This will always be a priority because it is part of what makes Apple – Apple, their seamless integration and total control of their software across all devices. They will need to continue and innovate the delivery of their content.

Apple gave a glimpse of their long-term plans in 2017. One of Apples more immediate focuses will be augmented reality. Where digital devices interact with the user’s environment. While other companies are focusing on the next wearable, whether glasses, headsets, or even contact lenses may one day replace the devices in our hands, Apple is concentrating on a software augmented reality for the near-term future. While, not nearly as powerful as a new device, this approach will allow Apple to get experience in the area and allow users to slowly be integrated to the idea of using apps and software to interact with the environment around them.

Apple also plans to take on the home automation market with their HomePod. While Apple is late to this market compared to Amazon and Google, there is still room for growth. Apple’s HomePod will allow the Apple ecosystem users to use Siri as their home assistant and allow further integration into the system.

Key Strategic Issues or Challenges

The biggest challenge facing Apple currently is consumers are stating to balk at feverishly upgrading their hardware. A combination of soaring prices and marginal gains are the causes for this problem. Apple must continue to innovate and give consumers a reason to upgrade if they want to continue to sell hardware at the rates they previously were. Software and services will could be a major player in continued revenue growth.

Potential Options Available to Apple

In the next few years industry growth for Apple can be concentrated in two areas, hardware and software. Hardware growth has slowed down recently, with markets in China slowing down. Most people who want cell phones in developed countries now have them, so the object is to make them want to upgrade. Apple has succeeded in this area extremely well until very recently due to marginal hardware gains and soaring prices. Focus for growth in this area needs to be in emerging markets such but are currently too pricey for the India and Africa market. Hardware areas to expand are also wearable such as watches and ear buds. But prices are lower and margins are thinner for these products. Wearables have been doing well lately for Apple but right now they are an accessory to their phones, and one day the phones will be replaced with something else. Software and services are areas for concentration. Digital content such as music and apps, along with Apple Care and Apple Pay will drive this category. As the cell phone market matures, other revenue sources must be strengthened.

Consultant’s Advice: Keys to Success

Computing power has seemed to plateau, especially in phones to some degree. Users no longer need the next most powerful device to keep up with what they want out of their phones. Apple has been based on innovation and they must continue to do that.

Steve Jobs said, “Some people say, ‘Give customers what they want.’ But that’s not my approach. Our job is to figure out what they’re going to want before they do. I think Henry Ford once said, ‘If I’d asked customers what they wanted, they would have told me, “A faster horse!”‘ People don’t know what they want until you show it to them. That’s why I never rely on market research. Our task is to read things that are not yet on the page.”

The trouble is figuring out what is the next big thing. Wearable such as their watch have been picking up momentum recently, this is a good thing for Apple. But the watch is an accessory for their phone, and one day phones will be replaced as tech gets smaller and more powerful. I think wearables augmented reality is promising, the ability to completely ditch your phone for some kind of wearable that overlays the information you need onto the world is lucrative. The trick is figuring out how to do it.

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