Strategic Issues for Apple in China

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18th Apr 2019 Business Strategy Reference this

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Introduction

Apple Inc. is a company that has established itself as one of the telecommunication leaders in China. The company however faces fierce competition from other leaders such as Samsung and Lenovo. Through external and internal analysis of the company, one identifies several strategic issues that affect the company’s performance. This paper will analyse these strategic issues and come up with a solution to the issues.

PEST Analysis

(P)olitical

China, having a communistic form of government means that there are heavy restriction in areas like the internet, their press, reproductive rights, freedom of assembly, and the freedom of religion as well. Internet companies like Google and Facebook have faced a lot of restriction (Apple, 2016). This hands apple a comparative advantage over these companies since Apple mainly deals with hardware.

(E)conomical

The Chinese economy is a favourable one to Apple since it continues to boom and hence elevating the national income, consumer spending and employment. In fact, in the first quarter of 2012, China’s GDP increased from 7.2981 trillion dollars to 12.382 trillion dollars indicating a 7.9% increase (Bajarin, 2014).

(S)ocial

Mobile phones are ubiquitous and Apple is doing incredibly well in china since their gadgets are attractive and pricy. This could be supported by the fact that the Chinese people love electronic gadgets (Chiang, 2013). The IPhone is a status symbol in social circles in china.

(T)echnological

Many industries are making fast improvements in China and other parts of the world and this is especially more vivid in the electronics industry where Apple is making significant strides. Apple has shown its ethical consideration in green marketing (Darlin, 2006). In fact, they changed their packaging to a lighter weight product to reduce emission during transportation.

Porter’s generic strategy for Apple in China

Differentiation is about creating a product that is unique in its own way and hence creating a unique value that makes the consumers prefer it to other products that are less differentiated and they will be willing to pay a premium price for it (Akan, et al., 2006). Apple has always used product differentiation leadership. Apple does not rely on cost leadership strategy to compete, they persuade their customers to become loyal to the brand and charge them a premium for it (Miller, 1988) (Porter, 1980). Apples products are based on quality, design, stylishness and greater customer service, while outsourcing actual manufacturing to trusted Original Equipment Manufacturers (OEM) allows Apple to differentiate its products from its competitors (Pretorius, 2008).

Apple’s internal organization

SWOT analysis

(S)trengths

Apple is a worldwide brand that has been the leaders of innovative and high tech products like the iPhone, the iPad, iPod and the MacBook (Forbes, 2016). They a well-known globally and has a large marginal value. Apple also has a large segment of customers loyal to the Apple culture. They also have a strong R&D department and a large market share in China (Rein, 2012). Finally, they have a unique product differentiation and a strong placement in education segment.

(W)eaknesses

One of the weaknesses that Apple is faced with include the fact that they have experienced very poor sales from iTunes store based on a known fact that the Chinese are customarily unwilling to pay for intellectual property (Einhorn, 2013). Another weakness with Apple is that without constant innovation to set itself apart from its competitors, their gadgets just appear to be overpriced.

(O)pportunities

One of the opportunities for Apple is market penetration into the Chinese cities as their population increases in urban China. Another is that there is growing demand for green and energy sufficient products and apple has taken the green route by reducing the weight of their products and packaging to reduce emissions during their transportation (Lin, et al., 2012). The booming Chinese economy provides an opportunity for Apple to open more retail stores since a growing economy reflects into employment, a higher national income and hence a higher individual spending which means business for Apple.

(T)hreats

Apple is highly dependent on consumer purchase, which means that in the event of low or no sales, losses are experienced. The opposite is also true. The other threat is the fact that the industry that Apple operates in is highly competitive with new entrants coming in with new or differentiated products every often (Hitt, et al., 2008). There is also the pressure of constant innovation. Without innovation, companies become irrelevant very fast in this industry (Chang, 2010). In the Chinese market, imitation patent and copyrights infringement remain an imminent threat to any player in this industry. The other threat is that having many competitors in this industry means that there is a constant pressure to reduce the price. The table below shows the price ranges of Apple products which are higher compared to those of local products.

Fig 1. Prices of Apple products in China. (Voigt, K., 2012.).

Michael Porter’s five forces

The Porter’s five forces of competitive position analysis provides a ground for assessment and evaluation of the competitive situation and strength of a business organization (Miller, 1986) (Porter, 1985).

Rivalry among existing competitors

In China, Samsung and Lenovo are Apples biggest competitors. Even though Apples products are highly differentiated in terms of design and functionalities from the competitors’ products, the two competitors have a strong presence in the market (Apple, 2016). This competitive advantage that Apple enjoys can only be sustained by constant innovation.

The threat of new entrants

The presence that Apple has in smartphone and personal computers industry in China is valuable, rare and very expensive to imitate. A potential entrant in this market would require to not only have significant resources, but also be very innovative to win a market share over.

The threat of substitutes

China is well known for her shrewdness in the electronics industry. The players in this industry are creative and have diverse products in terms of quality and price as well. This therefore means that there are various substitutes for every market niche (Georgieva, 2016). Apple still manages to press on and maintain these threats to a medium. Their products are high quality and pry and are targeted at the growing Chinese middle class and young adults.

The bargaining power of the suppliers

There is competitive pricing among the suppliers of hardware since the market is highly saturated. This therefore means that the suppliers have low bargaining power (Yoffie & Kim, 2010). Apple employs a differentiation strategy that requires that the firm to ensure that the suppliers provide very high quality components hence driving the supplier cost up.

The bargaining power of the buyers.

There is a high bargaining power of the consumers in China. This comes from the fact that there are very many competitors and substitute in that market. However, Apples brand of unique and highly differentiated products insulates or protects Apple from the price sensitivity (Bajarin, 2014). Apple also enjoys a very large segment of loyal customers in China, who remain so regardless of the competitor’s prices or products.

Fig 2. Apple’s porter’s five forces

Strategic options that would solve Apple’s issues in China

There are different strategies that apple could adopt in order to deal with the different issues it faces in the Chinese market. The Ansoff matrix is a strategic planning tool that provides some strategies that Apple can adopt to solve their strategic issues in China (Ansoff, 1957). The matrix is made up of four strategies, two of which are applicable to Apple Inc. The two strategies that could be applied on Apple China include market penetration and product development.

Market penetration

The market penetration strategy is a strategy that is usually used by organizations to develop the offerings that the company provides to its customers in their existing market. To do this, the company usually seeks to increase their market share in their current market segments (Ansoff, 1957). To increase the market share, companies sell more of their products and services to their current customers as well as find new customers within their existing market. A company seeking to use market penetration can increase their present sales in the existing market by using aggressive distribution and promotion (Aaltonen & Ikävalko, 2002). The aggressive distribution and promotion can be done by decreasing the product prices, merging with a rival in the current market, increasing promotion and distribution support, and refining the existing products. 

Apple Inc. in China is being faced with the problem of local competitors. These local competitors are a threat to Apple since they sell their products at a lower price. To support local industries, the Chinese government usually imposes great importation tariffs on foreign companies operating in China while being lenient on the local companies (Bradford & Duncan, 2000). This way the local companies are usually able to provide their prices at a cheap price. For instance, Lenovo is a luxury brand in China which offers competition to Apple Inc. since they are in the same category of luxury brands (Helal, 2015). However, the price of a Lenovo phone that has the same features as those of an iPhone may not match since Lenovo sells its products at a cheaper price. Apple can implement a strategy that involves decreasing its prices to try and compete with the Lenovo Company in China (Chang, 2010). To ensure they have reduced their prices without getting any losses, Apple may lay off some of its workers and adopt outsourcing as strategy to cut the costs. After cutting these costs, the company can manage reducing the prices of its products without suffering great losses (Team, 2012).

The market penetration strategy through price decrease is advantageous to Apple Inc. since the company will have the ability to compete with local competitors such as Lenovo based on prices and this way they will be able to improve their market share. However, the strategy is also disadvantageous in some way. First, the local companies in China are usually known for their great imitation (Voigt, 2012). This is a problem that has been affecting Apple greatly. By reducing the prices of its products, Apple will not be able to produce high quality and innovative products that cannot be imitated by other companies (Chang, 2010). Therefore they will suffer this problem more and therefore they may end up losing the market share, they were aiming at increasing.  

The second strategy that could be used in helping apple solve the strategic issues it faces in China is the product development strategy (Ansoff, 1957). The product development strategy is where an organization chooses to create new services and products in an existing market with the aim of achieving growth. The strategy involves increasing the range of products available in the current market (Allio, 2005). Achieving the increase in product range can be achieved through greater investment in research and development, acquiring the rights to produce another person’s work, joint development with ownership of a different firm that can access the company’s distribution brands or channels and buying in product and branding it.

Apple has faced great problems in the Chinese market from local companies imitating their products and therefore lowering their market share in addition to destroying their reputation of selling quality products. To solve this problem in addition to the problem of competitors, the company can adopt the product development strategy. There are different ways through which they can adopt the strategy. The most appropriate approach to adopting this approach is investing more on research and development (Alexander, 1985). These qualities may be so complicated for the Chinese companies to imitate and therefore the company will have solved the problem. In addition the company could continue investing in Research and development in order to keep up with the changing technology. This will help them avoid the risk of product obsolescence and remain a leader in the technological world (Bajarin, 2014). An example of a situation that investment in research and development would have been helpful is when they were creating the iPhone and iPads (Heracleous, 2013). With greater investment in research and development, the company would have realized that the two are incompatible with the flash technology which is a technology that has become so popular to the consumers. The lack of great research when developing these products will affect the company since people choose to go for products that are compatible with the flash technology (Sadler, 2003). This will therefore affect the sales potential of the iPads.

This strategy is advantageous for the company since it will help with the problem of imitation and competitors that affects the company. The strategy helps the company gain a competitive advantage by producing products that are innovative and that or of higher quality. This way the company gains a greater market share. However, the strategy has a problem in that it does not provide a solution to the price competition problem (Johnson, 2005). Investing more on research and development may lead a company into selling their products at a high price since they are of quality and they have used greater resources. Therefore the company will find it hard competing with the competitors in terms of price of products.

Considering the two strategies that can be applied by Apple Inc., the product development strategy is better off and should be the one implemented. Although the market penetration may be great in solving the price competition problem, the company may end up losing their market share due to imitations from other local companies (Ireland, et al., 2011). The product development strategy on the other hand is appropriate since it offers a company competitive advantage considering it increases the quality of products (Johnson, et al., 2011). In addition, the strategy will help Apple Inc. in China solve the problem of imitation by local companies. Through research and development, Apple will come up with products that are hard to imitate. This way the company will be able to increase their market share since the people will not go for the cheap imitated products as they will not be available (KVN, 2013).

Fig 3. Strategies to increase Apples competitive advantage in China (Rein, S., 2012)

Implementation of the product development strategy to Apple Inc.

For the whole process of strategy formulation to work, there has to be strategy implementation. In a research conducted by Mintzberg (1994), most of the strategies that companies formulate are usually not implemented. According to the study, almost half of the organizations do not usually conduct strategy implementation (Thompson, 2001). These organizations fail to carry out strategy implementation despite the clear importance that exists with this particular area. The potential value of a strategic plan cannot be realized and captured if a company does not carry out sufficient planning and implementation (Atkinson, 2006). For the effectiveness of the product development strategy planned to be effective, it needs to be implemented. The implementation of the plan needs to be done sufficiently to ensure the real value of the plan is realized and captured.

The first step that should be used in the implementation of the strategy is identifying the activities that will be carried out in the process of implementation (Bryson & Bromiley, 1993). One of the activities that will be involved in the implementation of the strategy is educating the shareholders and the employees on the need of the new strategy. In order for a strategy to be successful, the employees need to understand why there are changes in the strategy (Johnson, 2011). The other activity that would be important in the implementation of the apple strategy is creating a team that will handle Research and development. Although Apple may already have a department that handles research and development, there may be need that more human resources are allocated to the department since the company will allocate more capital in the department to ensure its efficiency (Brenes, et al., 2008). The new human resources to the department may also need to be educated on how to carry out activities in the department.

Apple is a company that mainly focuses on the culture of differentiation. Therefore with the implementation of the new strategy may need a change in the culture. It is important to ensure that the culture of the company is shaped to fit the needs of the strategy (Kono, 1994). A corporate culture that supports the strategy usually leads the organization into working hard towards the achievement of the strategy objectives.

One important thing that should be considered during the implementation of a strategy is that there is need for a rewards or incentives that should be directly linked to the strategy and the strategy’s objective (Okumus, 2003). Various studies have proved that people tend to work harder towards the accomplishment of a strategy when there are rewards or incentives linked to the strategy. For instance, in the implementation of the apple strategy, people can be offered incentives based on the innovative ideas that they may come up with after conducting extensive research. This will create constructive competition among the employees in the research and development department.

The implementation of the product development strategy in China should not take more than three months. Delay in the implementation of the strategy may be a problem since the company continues to lose market share. Every activity in the implementation process should have a certain timeline to ensure great approximation of the timeline. For instance, the training of the new recruits in the research and development department should take two weeks and the monitoring of the implementation should take three weeks.

For the monitoring process, the suitability criteria can be used to monitor the implemented strategy. This criterion will be used to evaluate whether the product development strategy implemented by Apple Inc. in China addresses the main opportunities and issues that the company faces.

There are however problems that may occur during the implementation of the product development strategy by Apple in China. One of the problems that may occur is resistance to change. People may be accustomed to the culture of innovation that may be resistant to change to the new culture. There may also be the problem of implementation going beyond the set timeline. The timeline will just be approximated and during implementation certain problems may arise that may cause the timeline to extend.

Conclusion

Apple Inc. is a company that has established itself as one of the telecommunication leaders in China. However there are strategic issues that exist preventing the company from achieving its full market potential. Through different internal and external analysis of the company, it is easy to identify this issues and come up with a strategy that solves them.

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