MGT 440, December 2009

Masi Strategic Analysis Apple Inc.

Page3 of21

STRATEGIC ANALYSIS 1.Apple Inc. Industry Forces and Attractiveness Analysis and Conclusion For the purpose of illustration, the industry analysis of Apple Inc. will focus specifically on the portable personal computer manufacturing and sales and on the United States market, although many of the firms involved in the industry produce, market and sell internationally. Considering the threats faced by firms operating in this industry the industry is moderately attractive overall. Many firms within the industry have thrived, but competition is very high, while suppliers and buyers have moderate influence over the competitors. There are several avenues by which new competitors may enter the market, but they face substantial hurdles in successfully establishing a viable brand. Finally the threat of substitutes is credible in some usecases, but will not completely usurp personal computers in the foreseeable future. See Appendix A1 for accompanying template. Rivalry Between Competitors While once an industry defined by few large companies and extremely expensive products, pursuing a niche audience, the advent of the personal computer (PC) has caused an industry explosion which now includes dozens of manufacturers pursuing many millions of customers in the United States. As a result of the penetration of computers into everyday life and business the PC is becoming more and more a commodity product. For most users, and business economy is more important that performance specification and other bells and whistles. The result has led many manufacturers to pursue low-cost and best-cost provider strategies. Those at the lowest end compete on rock-bottom prices foregoing all but the most basic features. Those in the middle range including Dell, HP, and Lenovo compete for customers offering a range of options for varying prices. The similarity of their products due to industry standard setting also leads to price competition that drives down prices and squeeze margins. The desire of companies to buy large numbers of PCs for the lowest bid available also exercises considerable downward pressure on prices offered by these firms. The nature of technological development also imposes increased competition on the members of the industry. The technology behind many key components of PCs continues to become more efficient with increased processing power and less energy consumption. Moores Law predicts that the number of transistors on a processing chip roughly doubles every eighteen to twenty-four months.1 While is more an estimate than a law industry leaders like Intel, Inc. have kept this pace for decades. This perpetual innovation and development puts pressure on computer manufacturers to streamline production and refresh products at a pace largely unseen in business for centuries.2 Supplier Power Suppliers have considerable leverage over the manufacturers of portable personal computers. While many industry standards like universal serial bus (USB) and wireless
1 2

Intel Corp. Moores Law. Retrieved 2009-12-09 Apple Inc. SEC 2009 Form 10-K Filing. Page 16

MGT 440, December 2009

Masi Strategic Analysis Apple Inc.

Page4 of21

technology are open and issued by independent or collaborative standards bodies like the USB Implementers Forum (USB-IF, universal serial bus) and Institute for Electrical and Electronics Engineers (IEEE, wireless standard 802.11n) manufacturers also rely on privately owned standards. Often the technology must be licensed or requires entrance to a paid-membership industry group for use. For instance, for the specifications and use of the PCI-Express/Express Card standard, which is present in nearly all personal computers, membership to the industry group PCI-SIG is required.3 In addition, the relative concentration of suppliers for some inputs puts pressure on competitors. Within the personal computer industry, central processing units (CPUs) are sourced from a duopoly, Intel Corp. and Advanced Micro Devices, Inc. (AMD). Despite having two options, the semi-conductor market is dominated by Intel, with AMD licensing technology from Intel for use in production of their CPUs.4 Despite having compatible chip technologies; these two companies use proprietary chip designs that require different motherboard socket designs. Because of this incompatibility in design, for a PC manufacturer to switch suppliers of CPUs they must also switch to a new type of motherboard, which drives up switching costs. Despite this power the chip manufacturers hold, they are not present in the PC manufacturing business and therefore are reliant on PC manufacturers for a bulk of their business. This leads to discounts for bulk purchasing and exclusivity agreements, which alleviates some pressure from the dominant suppliers. Buyer Power As in all industries buyers have the final say and exercise considerable influence over manufacturers. The variety of buyers with many, widely varying needs directly impacts PC makers who must adapt and react by offering broad product lines. The marked distinction between power users seeking the latest and greatest and average users who need a product that is just good enough poses an obstacle to manufacturers who want to tap as many customers as possible. Manufacturers are benefited by the wide acceptance and use of PCs which causes high demand for products. Proprietary systems and brand loyalty are also used to keep customers coming back. Highly compatible closed-systems are routinely used to keep customers within a circle of products provided by single companies. Threat of Potential Entrants There are many avenues by which a new entrant may enter the portable personal computer market; however there are several hindrances that may prevent successful entrance. Currently in the market there are several large, well entrenched players that have substantial brand recognition and loyalty, including Dell, HP, Lenovo, and Apple among others. Developing a successful brand among many others is difficult. These players also dominate and keep costs down with economies of scale, which cannot easily be achieved by a new entrant without substantial capital investment.
3 4

Sherwin, Lisa M. PCI-SIG Delivers PCI Express Specification Extensions. 2003-02-19 Farrell, Nick. AMD Takes Intel Market Share. 2009-06-10

MGT 440, December 2009

Masi Strategic Analysis Apple Inc.

Page5 of21

Despite obstacles there are still possibilities for entrance. New entrants may come from newly established lean organizations which rely primarily on third -party original equipment

manufacturers (OEMs) for production. Established OEMs often operating in Asia have already
achieved economy of scale and can pass these savings onto new firms that practice re branding as a market entrance plan. The increasing convergence of mobile devices resulting from the push of smart-phones and netbooks is bringing phone makers into the portable

personal computer market. Nokia, a well established phone maker, has fired it s first test shot by planning to release a netbook of its own.5 Another mode of entrance is a result of forward vertical integration by OEMs. This trend has increased in popularity over the past decade, bringing companies like Acer, Inc. into direct competition with well-known industry giants. Formerly an unknown, by 2005 Acer had revenues of over $1 Billion in the United States, $8.17 Billion worldwide.6 Today Acer has over $16.5 Billion in revenues worldwide and oversees brands such as eMachines and Gateway.7 Threat of Substitutes The consumer technology sector has grown substantial over the past decade with the advent of alternatives to personal computers growing from PDAs and now feature-rich smart phones The increase in technology in the average American living room. These developments result in the spread of consumer technology dollars away from PCs. However, despite the spread it is unlikely that smart phones, like the iPhone or Blackberry, will significantly diminish the importance of PCs in the near future. This diversification of consumers digital lifestyles presents an opportunity for diversification of PC manufacturers, a step many are already taking. Recommendations Based on the industry analysis, I recommend: Create a differentiation strategy: The commodity PC market presents a perpetual downward pressure on prices, which erodes firm profitability. Developing and brand image that separates the firm from the competitive rat race will reduce the effect of destructive competition and pad margins. Develop close relationships with suppliers: Because there are few suppliers of key components required in PC manufacturing developing close relationships with suppliers is of utmost importance. Rather than searching for the supplier of lowest cost, maintaining a collaborative and exclusive business relationship will help mitigate the power of suppliers and help to lock in attractive component prices. Consumer electronics diversification: While the PC market has grown increasingly crowded with competitors and customers saturated other areas of consumer electronics continue to grow. Developing complementary products in other categories provides broader sources of revenue by accessing more customers in markets with less intense competition.
5

Paul, Ryan. Nokias little netbook gets AT&T subsidy, to cost $299. 2009-10-14 Acer, Inc. Acer America Corporate Overview. 2007-03-20 Yahoo! Finance. Acer Inc. Company Profile. Retrieved 2009-12-05