Apple has transformed its business segment over the last decade. This began with the launch of the iPod in 2001, increasing profitability and creating growth. Apple further enhanced their profitability by expanding the operating segment, launching the iTunes store, and more recently through the acquisition of Beats. NPD Group (2012) found 63% of digital downloads run though Apple.
The major turnaround occurred in 2007 when the company launched an Internet enabled smartphone (The iPhone). This started the golden era of profitability and technological expansion for Apple. Apple has penetrated most of the developed countries, and even reached saturation point in Europe with its high end products including iPhone and iPad. It is yet to make a significant impact in the developing countries including China and India, which has around 36.8% of the worlds population. The research firm IDC (2013), found Apples market share for androids in China was only around 7%, below Samsung and Levono Group.
1.2 Research Aims
Alfred Chandler (1962) defined strategy as The determination of the basic long-term goals of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals. In order to analyse the firms strategic position we will further this research into three sections. The first, looking at the impact of the environmental factors. This will be done using a PESTEL analysis, as well Porters Five Forces model. Secondly we will consider the strategic capability of Apple by using a SWOT analysis. Finally analysing Apples innovation and internationalisation strategy in more detail. Concluding by offering recommendations for Apple and its competitors.
2. Environment Analysis
2.1 PESTEL Analysis
It is important for every organisation to identify the impact of environmental analysis on its business operations. Apple is currently operating in more than 100 countries, meaning external factors have a significant impact upon the company. Identification and constant monitoring of these factors is important to minimise the effect they have on Apple.
Apple Inc. Form 10-K (2013) stated that approximately 63% of the Apples revenue comes from countries other than America. Thus the political environment of various countries will significantly impact the revenue of Apple. The current political unrest in Crimea and the annexation to Russia from Ukraine could affect Apples sales, due to USA and Russian relations. In 2013 Apple sold approximately 1.6 million iPhones in Russia making it an important market for Apple. It is important for Apple to continuously monitor this situation in respect to their sales in Russia.
China is now the worlds largest market for smart phones with 26.5% of all smart phone shipments, Forbes (2012). As shown below.
For Apple to enter the Chinese market, a joint venture must be set up with a Chinese partner. This led to Apple joining with China Mobile. Apples market share has grown by 1% in the last quarter of 2014. This has led to Apple now being the 5th largest vendor of androids in China.
The analysis of the global economy is of vital importance. During a period of recession such as the one just seen, disposable income falls, and unemployment rises. Apples product could be seen to be a luxury product, where quantity sold declines as income falls. This may lead to a fall in sales for Apple. However, during the recent recession Apples sales increased. Asymco (2011)
The graph shows how Apple maintained continual growth in revenue over the 09 period and onwards. Although its product may be seen as luxury, Apple managed to differentiate its product from competitors, and so created an increased demand. Additionally, with a depreciation of the dollar, the purchasing power of parity in foreign countries improves, and so Apples products become relatively cheaper. This led to an increase in international sales.
2.4 Socio- Cultural Factors
The social life of an individual has significantly changed over the past decade due to the revolution brought by a rapid expansion of social media such as Facebook, Twitter, and LinkedIn. These social media networks have their own applications on iPhone. This gives users both business and consumers, a good medium to communicate with friends, family and business contacts. Apple has shaped modern culture by doing such, and this has increased demand for its product. Furthermore, Apple has entered the media market by the commercial linking of consumer products, with the iPod and through the launch of iTunes. This made a significant impact on 12 to 35 year olds using such products to enhance their social lives. 63% of digital downloads occur through iTunes, which gives Apple a dominant position in this market. By staying up to date with the changes Apple can increase its demand for both product.
Technological factors are instrumental to the success of Apple. As one of the leading innovators in a technological industry, Apple must stay at the forefront of new developments. Steve Jobs was well aware of this: Innovation distinguishes between a leader and a follower, (The innovation secrets of Steve Jobs, 2001.) This led to Apples first steps, transitioning from a computer manufacturer to a leading technology company. This occurred through the iPod and more recently the iPhone and iPad. There was an awareness to develop new products as well as operating systems, which made the total range of compatible products attractive to consumers.
KPMGs Technology Innovation Survey (2013) found that the US is most likely to find a disruptive breakthrough in technological advancements, contrary to beliefs a few years ago.
However, China is close behind, with 24% of the votes believing China will see the next disruptive breakthrough in innovation. Either way, Apple must be very aware of what competitors are producing. If they do not utilise advancements in production or ICT revolutions they will be left behind.
There is now a greater awareness on a global scale to reduce emissions and become more environmentally friendly. Laws and regulations in United States have changed and this has made manufacturers responsible for recycling their waste. For this purpose Apple has established domestic recycling facilities which will help the Company to recycle its waste in United States and to follow the rules and regulations. Apple has communicated its willingness to adopt a green production process in order to protect the environment. This may enhance its credibility in the local and international markets. Apple Website (2014) We want to leave the world better than we found it. We aim to create not just the best products in the world, but the best products for the world. Clearly Apple are making conscious steps to lead the way in becoming a green company, and to mold with the changing views of the population.
Apple operates in more than 100 countries and the legal environment faced by the technology giant is of utmost importance. Apple has filed various lawsuits in court for violations of intellectual property rights (IPR) . Protection of IPR and patents will significantly impact revenue and future profitability. One of the most famous cases is where Apple won a $1.05 billion lawsuit against Samsung, showing the importance of the Legal system in the US. Furthermore, Apple is subject to international laws, policies and procedures. To compete in the Chinese market, Apple has ventured with China Mobile. Apple must continuously work alongside laws and regulations to maintain its brands equity. Operating in such a vast number of countries increases revenue, but leads to the arduous task of keeping up to date with all laws in all countries.
3. Porters Five Forces
Michael Porter developed this Five Forces model, which is used as a tool for companies to analyse business strategies. The use of the forces can determine the intensity and the attractiveness of the industry, reflecting
the profitability of the industry.
3.1 Threats of New Entrants
If market entry is easy, and barriers to entry low, then the competition in a market will be much greater. There are a number of factors which limit the ease of entrance. In the PC and mobile phone industry, the market has high levels of competition, and so threat of new entrants isnt high. Apple has managed to gain very high levels of brand loyalty with its customers. Apple emphasise R&D and product innovation, which satisfies consumer demands. Apple also benefits from economies of scale, linking its production of different goods and services together. Finally, Apple has set up manufacturing plants in China where the labour and costs of production are cheaper. These factors all create high barriers to entry for new competition. Therefore, the main threat is between existing competition developing products to match that of Apple, and not from new entrants.
3.2 Threats of substitutes
The more similar a substitute is to an Apple product the less power Apple has. This reduces Apples ability to charge higher prices. In the Mobile phone, PC, and Tablet industry there is a huge variety of products available. This puts Apple under constant pressure. For example, Apples flagship device, the iPhone, has rivalry from various smartphones, such as Samsungs Galaxy S4 and HTC. The major reason for Apples success is due to its superior quality of product, along with brand recognition. This has made Apple the most valuable smartphone brand (The Worlds Most Valuable Brands Forbes. 2014). Apple must endeavor to maintain this brand loyalty to reduce the threat of substitution and charge to premium price for the products.
3.3 Supplier Power
Apple has a few key suppliers for some of its components, such as Foxconn. Foxconn could use this fact to their advantage, and exhibit higher bargaining powers. Apple uses its rival Samsung to produce the chips for their iPhones. This reliance on Samsung gives them great deal of bargaining power. Supplier power is slightly reduced due to the sheer size of Apples business, enabling them to force lower prices by buying in large quantities. Over the years, Apple has developed unique alliances with suppliers helping to streamline the supply chain. Alliances with music partners and software companies such as AT& T has helped to increase the revenue base of the Company, without increasing the powers of suppliers. Steve Jobs was a known to be a control freak, and focused on reducing the bargaining power of suppliers from the use of vertical integration.
3.4 Buyer Power
The bargaining power for most Apple consumers is low. Apple fanatics are willing to pay premium prices for Apple goods. In the case of the Mac laptops, the price is almost double of that of its rivals. Consumers are willing to pay this for both the name and the superior quality of the product. The vast number of Apple consumers has reduced their power to lower the price of Apple products. Apples goal should focus on reducing the consumers bargaining power. It has tried to do this by developing products specifically for consumers needs and wants, enabling them to charge a higher price. Griffin Consulting Group (2012) find that there are high switching costs for customers who want to change software or hardware which again reduces the bargaining power of customers.
3.5 Rivalry between Competitors
The PC and Mobile industry is very competitive, with a large number of similar sized firms. Rivalry in this industry is seen by; aggressive pricing, rapid product innovation, intensive marketing, and after-sale services (Forbes Website, 2012). This is used to add value to the product. Apple tries to differentiate its product from its competition. It implements a focus strategy, only developing a few products and targeting them for the need of the customer.
Steve Jobs was quoted saying this: People think focus means saying yes to the thing youve got to focus on. But thats not what it means at all. It means saying no to the hundred other good ideas that there are. You have to pick carefully. Im actually as proud of the things we havent done as the things I have done. Innovation is saying no to 1,000 things, (Apple Worldwide Developers Conference, 1997). For example, iPhones are targeted to consumers rather than businesses. Macintosh computers are targeted to creative professions such as designers and photographers. By doing this Apple has stayed competitive in a highly rivalrous market.
4. SWOT Analysis Apple
The SWOT analysis of Apple will be used to evaluate the strategies with respect to its strength weaknesses opportunities and threats. Apple needs to further strengthen its strategies in order to attain benefits from the opportunities that exist in the environment. Below is the SWOT matrix, followed by a more detailed analysis of a few key points.
Strong Financial Performance
Strong Marketing Team
Patent And IPR Protection
Incompatibility With Different Operating systems
Decreasing Market Share
Long Term Gross Margin Decline
High Demand Of iPad and iPhone
Growth of Phone and Tablet Market
Acquisition Of Smaller Firms.
Strong Growth of Mobile Advertising Market
Increasing Demand for Cloud Services
Increase In Supplier Prices
Foxconn Workers Pay Levels
Price Challenge From Samsung
Android OS growth
Apple has won the award for being the leading innovator in the world BCG (2013). Apples core competency has helped it to establish itself as the most innovative company in the last decade. The fact that the R&D expenditure of Apple in the year 2013 was approximately $4,475 million, which is approximately 30% of its total operating expenditure. Thus it is evident that the amount of R&D expenditure helps the Company to remain leading innovator in this technology industry. By being the leading innovator, Apple has established a strong base of loyal customers. Once Apple always Apple, is the phrase which is used by the customers of Apple and there is always strong interest and demand at new product ranges. The expansion of Apple into other product categories like iTV and other media will further increase customer loyalty. Apple expects its existing customers to use iTV, which will be more technologically advanced than its existing products.
A strong marketing team has made Apple products famous among its customers. Last year it spent $933 million on advertising Forbes (2014.) Through the marketing of the products it is able to sell at a higher price compared to its competitors. Due to these factors the brand reputation of Apple is immense compared to its rivals, such as Microsoft and Samsung. Forbes (2013) valued Apple at $104 billion, whereas its rivals Microsoft and Samsung had brand values of $56.7 and $29.5 billion respectively. This shows the strength of Apple with respect to brand reputation and this is helping Apple to increase its revenue and profitability over all these years.
Apple controls its retail distribution by exclusive sales from its own network. Apple stores provide a higher quality customer service experience. Knowledgeable staff helps the customers, who increase the brand equity and thus increases the sales for the Company. They average Apple store size has increased by 3,000 square feet to 10, 500 square-feet. The average revenue per store of this is $50.2 million, Fox Business (2014). These stores are one of the best when it comes to sales per square feet, and this is a great strength for Apple.
Finally, Apple is currently the leading company with a market capitalisation at the end of the fourth quarter of approximately $504 billion. This is due to the strength of their financial performance over the past few years. Apples cash balance is approximately $14.25 billion and their Balance Sheet shows an asset base of $207 billion in 2013, from Ychart (2014). Apple is therefore in a strong position to respond to most competitive threats.
One of the major critics about Apple products is that it is much more expensive than other comparable devices in the market. Fierce competition in the consumer product market is a disadvantage for Apple, as consumers can choose similar lower priced products. As well as this critics dislike the incompatibility with different operating systems. Products, particularly desktop and laptop computers manufactured by Apple only use its own operating system and thus the software and hardware are interdependent on each other. Critics argue consumers would rather buy products from various vendors, which is possible with Windows products. Apple computers are dependent on the growth of Apples OS, which could prove to be a disadvantage. If technological growth is limited then this will affects Apples ability to increase its market share in different industries.
The market share of Apple has decreased over the past few years due to Androids growing popularity, as it is a free operating system. It was estimated that in 2014 the market share of Apple in smartphone industry would remain at 14.9%. Now it is expected to decrease to 14.4% in the year 2018, due to growth in the sale of the Windows phone. Thus it is important for Apple to improve on its technological advancement, including making more innovations with its operating system. More exclusive Apps on Apple could improve market share for Apple.
Finally there has been a long-term gross margin decline for Apple. The major reason for the decrease of Apples margin is the increase in its cost of sales. In 2012 the gross margin was around 44%. This has significantly decreased in 2013 to around 38%, and thus shows that Apple needs to decrease its cost of goods in order to increase the gross profit margin in the long term.
IDC (2014) found that 87% of connected device sales by 2017 would be from tablets and smart phones. Apple with its own product has the capability to produce and innovate technology in this sector to increase its market share. Apple has launched iPad mini 2 and the demand has been increasing for this tablet. Samsung has launched its Flagship smartphone S5 during 2014, and hence people are eagerly waiting for the new generation of the iPhone 6. This will considerably help it to further increase its market share and revenue over the next year.
One of Apples opportunities is to increase its diversity of products through acquisitions. In the last 18 months alone Apple has acquired over 24 companies Tech Crunch (2014). Most recently acquiring Beats for $3.2 billion from Dr. Dre. There are a lot of new firms in the technology market, which are developing new products and features, which Apple can acquire. Due to the fact that these are patented features, Apple can get them through external acquisitions. Apples ability to purchase or negotiate will help to continue its long-term growth.
A future revenue stream, which Apple has tried to utilise, is the increasing demand for cloud services. IDC (2014) predicted that IT cloud services will reach $46.4 billion in 103, expected to increase to over $107 billion by 2017. This equate to a compound annual growth rate of 23.5%, fives times that of the industry. The Cloud based services offer huge potential revenue stream for Apple.
Finally, Apples iTV product is a major innovation, to its product range and will support the Apple TV, which will help its penetration into the TV market. Furthermore, this will also diversify the portfolio of the Company and will further increase revenue and profitability along with the brand equity in the technology industry.
Apple manufactures its products with the help of Foxconn. The wage level of Foxconn workers has tripled in recent years. This has led to rising costs for Apple. Further still, Samsung has asked Apple to pay more of its processing chips in its iPhones. The reliance on these suppliers has meant a rising cost level for Apple. Apple needs to identify more suppliers of processing chips, which should help it to decrease the overall costs. This in turn will improve their profitability and reliance on other companies.
The technology sector is experiencing rapid technological changes. This puts Apple under severe pressure to launch new products and features with new devices. Inability to do such will lead to failure. Apple over the years has introduced new products and services, which is helping it to stay ahead of its competitors. Soon it will face fiercer competition and innovation is key for survival.
Apple is facing a threat from the Androids rapid OS growth. The free operating system for smartphones Android is the most widely used operating system. Approximately 80% of the smartphones shipped in 2013 were based on Android. Therefore it is important for Apple to further increase the innovations by introducing new features in their operating system. This will help to maintain or grow their market share in years to come.
5. Apples Strategies
When considering the strategies that Apple had adopted it is important to consider how these strategies arose and the direction in which it moved the company. This is key in determining how the company can now move forward and pursue new goals.
Apple was found to be the leader in innovation for the last eight years running by Boston Consulting Group. When considering how Apple has become the company it is today, it is vital to talk about the innovation strategy that Steve Jobs implemented, and now more recently how, Tim Cook is moving the company forward. In this section we will also look at the use of a diversification strategy, which was implemented at the same time. The last strategy covered is an internationalisation strategy adopted by Apple.
5.1 Innovation Strategy
Freeman and Soete (1997) defined innovation as the The first commercial application or production of a new process or product. It involves the conversion of a new knowledge into a product or services and then the implementation of this. It can take two different forms; technology push, or market pull. The former is created by new knowledge and understanding from technologists or scientists. The latter is caused by the pull of consumers in the market, leading to innovation.
Before Steve Jobs turned Apple around John Scully decided that cost leadership strategy was vital. He did believe in a differentiation strategy as well, however he failed at differentiating Apples products from the leading rivals. This led to Steve Jobs taking control of the company and redefining the direction of Apple. He believed that innovation was the key to success. The industry was driven by low prices and expanding capabilities, so Jobs decided to innovate and at the same time differentiate Apples product from the market. In 2001 this with achieved with the revolutionary new product of the iPod. This allowed music to be stored on a small device holding thousands of songs. From here, iTunes was developed. Compatibility between this and other software allowed the iTunes store to become highly profitable.
With Apple growing rapidly, Steve Jobs continued with this successful strategy. The advertising campaign think different developed in 1997 has been at the core of Apples strategy. By being highly innovative, he achieved extremely differentiated products and ideas from their rivals. The iPhone was just this, and by being the first smartphone it has left competing androids in its wake. From one innovation to another, Jobs set up the App store allowing applications to be downloaded to a phone. This vastly increased the range of activities that this smart phone could do. More recently with an economic downturn the need for a cheaper Mac like product was developed, which could target consumers in a slightly lower price range. This led to the creation of the iPad. This was an example of consumer pull innovation Apple has used.
Finally, the iCloud which is a highly innovative product, allows customers to sync all Apple products using a network called the Cloud. This has been crucial in reducing the ability of consumers to switch between products, giving Apple the power to charge premium prices. This is an example of technology push innovation, an area Apple has specialised in. Most companies adapt to external environment and change strategies accordingly. Apple changed and drove these external factors. Focusing on innovation and by creating fashionable designs, Jobs changed socio-cultural factors, instead of adapting to them. The iPhone, iPad and iPod created a change in the culture, and the design of these was appealing, as well as technologically advanced. This has been a key factor in Apples Success.
5.2 Internationalisation Strategy
Rui et Al (2008) defined internationalisation strategy as The process by which a firm sells its good and services outside of its domestic market. They do this by both technology and managerial capabilities. Apples products are used in over a hundred countries. It is clear that Apple has used an internationalisation strategy to its advantage by dramatically increasing its consumer market. In fact 63% of Apples revenue comes from outside of America. The product iPhone in Europe has almost reached saturation point. Apples internationalisation strategy is a Global one which standardises its products. The only modification is the power source.
Apples engineering design and manufacturing is now controlled by one source, which is where it differentiates from its competing computer manufacturers. Apples engineering and design developers come up with ideas for products in the US, but then two large IT solution brans, Foxconn and Invetec manufacture this product. Manufacturing occurs in China and this is due to lower labouring costs. The use of this internationalisation strategy has been influential in driving costs down and so improving profits.
More recently Apple has targeted the Chinese market with the release of the iPhone 5C. Apple has been working to extend its market share in the Chinese telecom industry, which is the worlds biggest telecom market with a subscription base of more than 1.01 billion in the mobile phone industry. This shows the potential significance of the Chinese telecom industry. A large market share of this industry would mean a significant increase in its profitability for Apple. Apple started to concentrate in the Chinese smartphone market in the last few years and have seen significant increase in its revenue from this market. According to the Annual Report of Apple for the year 2013, the revenue from the Chinese market has increased from 7% of its total revenue in 2011 to around 15% of Apples total revenue in 2013. This shows how significant an increase from the Chinese economy could be for Apples future.
In accordance with the needs of the Chinese consumers, Apple identified innovation was needed to develop a new product for this market, and so launched the iPhone 5C. Apple also succeeded to negotiate a partnership with China Mobile, which is the number one operator in the Chinese telecom market with over 760 million subscribers. This has given a huge advantage to Apple, as now it will be working with China Mobile to increase its market share and eventually increase the profitability of the Company. Apple has established strategic alliances with a lot of mobile operators around the world, but this is one of its best deals due to the sheer size of China Mobile.
The ability of Apple to stay innovative and to keep its brandy loyalty is key to maintaining its position in the market. Many of Apples own products are substitutes for older products such as the iPod. Other smartphone competition such as Samsung and HTC are growing rapidly and rivalry is increasing in the market. The ability of competitors to catch up, and potentially develop products more advanced than that of Apple is a real concern.
There have been fears that Apple is becoming less innovative. Forbes (2014) ranked Apple as the 79th most innovative company, and argues that their methodology for calculation was more detailed than that of BCG. Competing companies should look to exploit this weakness. Samsung and HTC should look at investing heavily in R&D in order to release more and more sophisticated products. This would undermine Apple and its core strategy, allowing for huge potential revenues to be gained. To do this Apples competitors would need to advertise heavily in order to reduce brand loyalty to Apple. For this reason, Apple should continue to invest heavily in their marketing team.
Apple have tried to diversify their product line, but at the same time have created products which are profitable in their own right, such as iCloud and iTunes. At the same time it has created its own ecosystem where their products interlink between each other. The use of this reduces the consumers ability to substitute. Apple should focus on maintaining and developing this route. The use of the iTV is a positive sign of Cook identifying this opportunity.
The recent acquisition of Beats for an approximated $3.2 billion, Guardian (2014), may be an indication of a change or expansion of Apples strategy by Tim Cook. Apart from the headphone product, the expansion in the media market compliments the iTunes library of videos and music. This creates an ongoing revenue stream for apple, and opportunity to expand its growing sector of loyal Apple customers.
Finally, one main concern for Apple is sourcing of its components. With the increasing wages of Foxconn employees Apple should look to increases its suppliers. Or, Tim Cook should follow Steve Jobs view on this, and look at continuing the vertical integration to avoid reliance on others, and so reduce supplier bargaining power.
Since 2001 and the launch of the iPod, Apple has had an era of unbelievable growth and profitability becoming the most valuable brand in the world. Clearly without Steve Jobs and Tim Cook forging a clear and strong strategic platform this profitability would not have been sustained. The internationalisation strategy has been a huge success with levels of revenue from outside the US in the billions. A focus on continued innovation and the use of rapidly developing countries such as China and India will determine the future of Apple.
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