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Environmental Analysis of Apple, Inc.

Introduction

This study is an analysis of the business environment of Apple, Inc., which is typically undertaken as part of the strategic analysis of Apple’s operations for the medium and long term. The aim of this analysis is to assess the prospects of Apple, Inc. as a potential investment for consideration. There are three aspects of environmental assessment that are undertaken: the macro-environmental analysis makes use of the PESTEL model, industry analysis employs Porter’s Five Forces model, and the organisational analysis is performed using the SWOT model.

PESTEL Analysis

The business of Apple shall be evaluated within the context of its operations in the UK. Investor sentiment attached to the country plays a major role in determining the level of confidence reposed by investors in the country itself. Negative sentiment in the country overall may cause an investor shift that would affect stock prices even for companies in industries normally unaffected by the particular events or developments, thus consideration should be extended to indirect repercussions or contagion effects due to perceived weaknesses in the country environment (Chittedi, 2014; Haß, et al., 2014; Ioan, et al., 2013; Liu et al., 2014, Syriopoulos, 2014; Trenca & Dezsi, 2013; Yaqing & Hongbing, 2013).

2.1 Political

The United Kingdom is a democratic country with a stable governance system, and maintains strong influence over the laws and customs of those countries that were formerly part of the British Empire, and now comprise the Commonwealth of Nations. The UK thus holds a strong and enviable position in global politics. However, there are risks posed by terrorist elements such as members of the Islamic State of Iraq and Syria (ISIS) recruited from among the British nationals. Current political challenges include the increasing tensions in the ruling coalition and the sagging government popularity (UK Country Profile, 2013; USCIA, 2014).

2.2 Economic

The UK is a world economic power, with a highly developed economy that gained its footing after the Second World War. According to the World Bank’s assessment, as of 2003 the UK is the seventh best country to invest in or do business with. It is however burdened by a growing government debt problem (currently at £1.38 trillion) and a huge budget deficit. In order to strengthen the financial system, the Bank of England (BoE) was given the authority to oversee the macro-prudential health and stability of the financial system. The BoE coordinates interest rate movements with the European Central Bank during times of crisis, however Britain still remains outside the European Economic and Monetary Union (CEEDR, 2012; UK Country Profile, 2013; USCIA, 2014).

2.3 Social

The standard of living of UK citizens is comparable with other First World countries. The education and health care systems are among the world’s best, and the social goals of the government include the alleviation of income inequality and eradication of child poverty. As a member of the European market, the UK benefits from the free flow of young people into the country to offset the problems posed by an aging population. Demographically, the population is aging (i.e., 35% of the population are 55 years and older, only 30% are below 25 years), with average life expectancy reaching 82 years for women and 78 year for men (CEEDR, 2012; UK Country Profile, 2013; USCIA, 2014).

2.4 Technology

The United Kingdom is renowned worldwide for its scientific expertise and cutting-edge research and development (R&D). Intellectual property rights are stringently protected by legislation. Among the challenges to the UK with respect to technology is the increasing shortage of R&D workforce, a trend that has persisted since 2008. The number of engineers and technicians in the physical and life sciences, as well as IT and telecom specialists, continue to decline. The lack of technical personnel and R&D specialists is a serious threat to the continued competitiveness of UK industry. Patent applications have also been on the decline, meaning that innovations may slow down, further compromising competitiveness (UK Country Profile, 2013; USCIA, 2014).

2.5 Environmental

The UK is a strong participant in the formulation of global policies, particularly with respect to agreements dealing with the environment, emission reduction, and sustainable energy source. However, the UK is also known to have a high level of air pollution. The European Commission issued a final warning to UK for the poor quality of its air, prompting the country to expedite a solution to the problem (BBC, 2014; Mathiesen, 2014). High air pollution, due to exhaust fumes and emissions from power stations and factories, prevails in London, while dangerous levels of NO2 have been recorded in Birmingham, Glasgow and Manchester (BBC, 2014; Dugan, 2013; Mathiesen, 2014; UK Country Profile, 2013). Government policies, however, will continue to tread the middle ground between environmental protection and economic development (UK Country Profile, 2013; USCIA, 2014).

2.6 Legal

The UK has a legal system that is organised, transparent and efficient, and efforts are being exerted to make the processes in the courts simpler and more efficient and transparent (Great Britain Ministry of Justice, 2011). The legislative system favours a high level of freedom in business, primarily to enable investor trust and confidence. There is effective enforcement of the law; in the World Bank’s Doing Business indicators 2013, UK ranks at the 21st position among 185 countries with regard to enforcement of contracts. Challenges remain, however, in terms of tax evasion, and balancing personal liberties against the threat of terrorism. These challenges are being addressed by current proposals to amend legislation (UK Country Profile, 2013; USCIA, 2014).

Porter’s Five Forces

Porter’s Five Forces analysis is a model used for industry analysis. Apple plays a significant role in four businesses, namely the communication equipment industry, the music and video industry, the mobile phones industry, and the personal computer (PC) industry. Because its participation in the overall PC industry is comparatively small compared to its other products, only the first three industries shall be analysed here. Apple’s overall business includes eight product lines: iPhone, its related products and services; iPad and related products and services, Mac portables and other music related products and services, Mac desktops, iPod, software, services and other hardware (Apple, Inc., 2014; GCEIP, 2014).

3.1 Bargaining Power of Buyers

Communication Equipment Industry

Buyer power is moderate. Apple communications equipment caters to individual buyers, but each buyer has little bargaining power as he/she bargains for him/herself alone. If the company loses just one consumer, the effect on the company will be insignificant. Collectively, however, buyer power may be more significant, as switching costs are low. Fixed line telecommunication devices have a low degree of differentiation and there is little innovation taking place in this area, for which reason buyers are sensitive to price levels and could easily transfer from one supplier to another. Apple’s major competitors in this market include Lenovo, Nokia, and Samsung (GCEIP, 2014; CEIPUK, 2014).

Music and Video Industry

The bargaining power of buyers is moderate. As with the communications equipment industry, there are many buyers in this market, thus reducing their bargaining power. Offsetting this, however, is the low switching costs that enables customers to transfer brands quite easily. Also, there is a trend towards greater preference for online retail channels and digital download sales due to their greater convenience. Buyers are therefore sensitive to price, recommendations, availability, loyalty schemes, and brand image. In the global music and video industry, Apple’s key competitors are Amazon, Tesco, and Wal-Mart Stores (GMVIP, 2014; MVIPUK, 2014).

Mobile Phones Industry

The bargaining power of buyers is moderate. There are two types of buyers in this market, the retail outlets (e.g. Europe’s Carphone Warehouse, Walmart) which purchase handsets for sale to consumers, and the mobile network operators that now make their own retail sales bundled with the service they offer. The large retailers are at a disadvantage because they need to stock up on the latest innovations to meet end-user demand. When new innovations or models appear, unsold inventory of earlier models become obsolete. Apple is at an advantage because the firm is capable of forward integration – i.e., they conduct their own retail operations. As a result, buyer power is diluted. Apple’s closest competitors in this industry are LG Electronics, Nokia, and Samsung (GMPIP, 2014; MPIPUK, 2014).

3.2 Bargaining Power of Suppliers

Communication Equipment Industry & Mobile Phones Industry

Supplier power is moderate. There are only a relatively small number of large multinationals who supply parts and components to this market, reducing market players’ options when sourcing for products. While backward integration is difficult due to high costs of telecommunication manufacturing, it is however not impossible; for instance, British supermarket brand Tesco will launch its own smart phone device, which if successful and followed by other retailers will reduce supplier power. Aside from their scarcity, suppliers are also benefitted by the level of customer loyalty that firms develop for their manufacturers. Apple, however, is one of those few companies which sell their products online and which operate their own retail shops (GCEIP, 2014; CEIPUK, 2014).

Music and Video Industry

Supplier power is relatively high in the music and video industry. The suppliers in this industry pertain to the purveyors of content, such as the record companies, TV studios and film studios. End-user tastes drive demand, and when the particular content is specifically in demand then market players are compelled to stock on popular products so as not to miss out on revenues for songs, movies, or shows that have high appeal. Also, suppliers such as large film and TV studios tend to integrate forward, that is, they sell directly to the retail market through their own websites. In these situations, there is strong supplier bargaining power (GMVIP, 2014; MVIPUK, 2014).

Mobile Phone Industry

Supplier power is moderate in the mobile phone industry. Mobile phone manufacturers are much larger than their suppliers, and are therefore in a position to better influence supply contracts. Operating systems are vital components to smartphone manufacturers, but in the case of Apple and Blackberry the operating systems are developed by the manufacturers themselves, and therefore one element of supplier power is diminished (GMPIP, 2014; MPIPUK, 2014).

3.3 Threat of Substitutes

Communication Equipment Industry

The threat of substitutes is moderate to strong, as product substitution may potential exist within the market. Landline phones and mobile devices are substitutes for each other, although mobile devices have the advantage of flexibility, portability and mobility. In developing countries, counterfeits may proliferate, drawing demand away from legitimate retailers, but such risk is gradually being eroded by regulation, law enforcement, and security measures. Cheaper second-hand products are also substitutes for new models, which may challenge the higher-priced Apple products in certain market segments (GCEIP, 2014; CEIPUK, 2014).

Music and Video Industry

The threat of substitutes, particularly from counterfeit media, is very strong; this becomes apparent when one considers that digital video and audio content are easily duplicated. Pirated titles appear online, on CDs, and more recently through streaming and file sharing websites. While lawsuits have been filed and litigation pursued in some cases, the lawsuits are so slow that by the time they take effect, damage has already been done that cannot be undone for the titles thus distributed. The same contents made legally accessible online also act as substitutes for the same content formatted on CDs and DVDs. Although demand for the latter may decline, there will still remain buyers who prefer their music or shows on a physical device (GMVIP, 2014; MVIPUK, 2014)

Mobile Phones Industry

The threat of substitutes is low. The threat posed by landline telephones as substitute for cellular phones is weak, due to the greater flexibility, portability and wide area coverage offered by mobile phone usage. Neither are laptops a strong substitute due to disadvantages in size, weight, and the capacity for outward calls (GMPIP, 2014; MPIPUK, 2014).

3.4 Threat of New Entrants

Communication Equipment Industry

The threat of new entrants is moderate. There is a low degree of differentiation among the products and services that players in this industry can offer; this signifies that customer loyalty is low, and customers tend more to follow the brand of the manufacturer rather than the retailer. Since buyers can easily switch retailers, low cost entry into the market is possible. Entry barriers are thus low, and threats of new entrants is strong, despite the fact that more established and larger-sale retailers would have developed better relationships with their suppliers as well as enjoy economies of scale (GCEIP, 2014; CEIPUK, 2014).

Music and Video Industry

The threat of new entrants is strong, and entry barriers to this market are low. If the prospective player already runs a retail business, then entry into the market becomes easy. Switching costs among vendors is low, and enables customers to transfer among players depending on the price, stock or brand image. Larger players carry strong brand images; however, this alone will not be sufficient basis to draw market share away from new entrants (GMVIP, 2014; MVIPUK, 2014).

Mobile Phones Industry

The threat of new entrants is moderate. The popularity of smartphones continue to attract new players which offer the same features as the established brands, such as Apple and HTC. A good number of the more mature mobile phone manufacturers offer their own smartphones. A market for cheap feature phones thrives in developing economies. New entrants are nevertheless faced with challenges, such as the huge amount and the specialist skills and experience required for capital outlay for R&D in which Apple is well entrenched (GMPIP, 2014; MPIPUK, 2014).

3.5 Internal rivalry

Communication Equipment Industry

Internal rivalry in this market is low to moderate. The market for global communications equipment is highly fragmented; market participants are numerous and diverse, including large foreign companies as well as local independent shops. Competition is slightly more intense among specialty shops than it is for the larger firms that have a presence in several markets. Even so, competition tends to ease because the demand for digital communications products is still expanding, enabling all firms to acquire a reasonable share of the market (GCEIP, 2014; CEIPUK, 2014).

Music and Video Industry

Internal rivalry is strong, mainly due to the similar choice of products offered by competing players and the low switching costs among market players. Unless the content is originally produced or published by the player, it would not be able to sustain any long-term competitive advantage over its rivals as content and processes are common and indistinguishable (GMVIP, 2014; MVIPUK, 2014).

Mobile Phones Industry

Internal rivalry among mobile phone manufacturers is moderate, with the lion’s share of the market being shared among a few large and well-known firms (i.e. Apple, Nokia, LG, & Samsung). A second tier of smaller manufacturers are directed towards specific niches and do not really pose strong competition to the larger firms (GMPIP, 2014; MPIPUK, 2014).

SWOT Analysis (Datamonitor, 2011; MarketLine, 2014)

4.1 Strengths

Apple’s several businesses are the result of a combined horizontal and vertical integration. Horizontal integration is comprised of its wide range of products, while the interconnectivity among such products is the result of the vertical integration. This has enabled the firm to create strong competitive advantages that competitors find difficult to challenge.

Apple continues to enjoy strong growth rates and cash flows, as sales remain brisk particularly on its online stores.

Apple commands high Application Service Providers (ASPs) which continue to perform well in the market while demand for ASPs of other company providers has declined.

4.2 Weaknesses

Apple failed to anticipate certain product categories such as phablets, and therefore was a later entrant into them. Until recently, Apple had not launched a larger screen phone, despite having invented the tablet. Samsung outperformed Apple in this respect, having pioneered in the phablet with Galaxy Note in 2011, and now has a commanding presence in the phablet market.

Apple positions itself in the premium category and prices itself at a single price point. Consumers who could not afford the premium price therefore turn to Samsung and other brands that have a range of differentially priced products for different markets.

Apple has an overdependence on the iPad and iPhone for its revenues and growth rates; the revenues from these two products comprise 72.1% of its total revenues for 2013. Eventual decline in the sales of these products will threaten the company’s sustainability and viability.

4.3 Opportunities

The iPhone and iPad remain popular in the personal gadgets market, and further growth in their sales could still be explored in the corporate arena. A trend known as bring-your-own-device has become popular in the workplace, as people have appropriated these personal devices for their business purposes. Companies have only begun to exploit mobility strategies to offer better choices to the customers, and iPads may be tapped for this.

Apple has yet to fully tap the growth prospects in the emerging markets. There is a rising middle class in India in which Apple may carve out a greater market share. It should be recalled that India is a member of the Commonwealth with which the UK is developing increasingly closer ties. The vast market in emerging countries is far from saturation, and Apple in UK is in a position of take advantage of it.

4.4 Threats

One of the weaknesses of Apple cited is its premium pricing policy. This policy shall prove detrimental to any efforts to penetrate an emerging market, because few if any will be able to afford it. Therefore, in the event of any economic downturns that tend to erode the buying power of consumers, demand may shift from Apple’s more expensive products to lower-priced competitors like Samsung.

The complex environment of electronic communication devices is constantly innovating and poses a serious challenge to Apple’s position in the market. Players are aggressively competitive, principally because of the fluidity of this disruptive innovation that allows for constant redesigning and modification.

Conclusion

The business of Apple, Inc. is a viable investment in the UK, although recommendation of entry stock price will have to await a valuation analysis of the stock based on financial and economic models. Being an investment that relies in technological innovation, Apple will have to be a growth buy, that is, it may not have long-term prospects but it will continue to have a strong market presence in the medium term. The principal concern of investors will be the sustainability of Apple’s cutting-edge innovations in the post-Steve Jobs era. Apple should continue to maintain its core competence in technological innovation and its competitive advantage in its horizontal and vertical integration to remain a viable investment.

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