Apple Inc Competitive Advantage Analysis

The mobile devices industry is a competitive market dominated by key firms like Nokia Corporation, Samsung Electronics Company, and Motorola, Inc. These companies, which have extensive product lines, capture a large portion of consumers in the mobile devices industry. However, the release of Apple, Inc.’s iPhone, in June of 2007, positioned the company as a direct competitor in the industry as the iPhone offered a variety of unparalleled features. Although the product has confronted various problems since the unveiling, Apple has done well to identify key internal and external threats that challenge the success of the iPhone.

Conceptual frameworks, such as Porter’s fives forces model and VRIO analysis (Value, Rarity, Imitability, Organization) establish Apple’s resources and capabilities and identify the organization’s positioning within the market. The analysis also provides an understanding of Apple’s current competitive advantage and provides information necessary for strategic planning.

From these studies, it is apparent that the iPhone has had tremendous success per volume of sales. However, with Apple’s severely limited product line, little product diversification capabilities, and the recent release of similar alternatives, such as the T-Mobile G1 by Google and the Dare by LG, the iPhone’s competitive advantage seems fleeting. New strategy and direction is pertinent to the continued success of Apple’s iPhone.

Upon review, it is Cooperstown, Inc.’s position that Apple adopt one of two strategic solutions: an open market service provider strategy or an iPhone customization and diversification strategy. The former solution would allow iPhone to pair with any particular provider upon end user discretion. Currently, AT&T has contractual rights to the distribution and sale of the iPhone in the United States as the mobile device is only compatible with AT&T service plans. Allowing consumers to choose service providers eliminates contractual buyer bargaining power and attracts more customers who are using different providers.

The latter solution provides consumer specific customization and hardware packaging which would increase Apple’s product diversification and eliminate the threat of competitive alternatives. Meeting consumer wants is crucial for the continued success of Apple’s iPhone.

Although these two strategies would solidify Apple’s competitive advantage in the mobile devices industry, the implementation of an open market service provider strategy is a stronger solution that provides long-term revenue benefits and attracts a larger consumer base. Although the initial cost of exiting the contract with AT&T might be detrimental, increasing competition in the telecommunications industry will favor Apple’s future success. This increase in competition will lower the cost of service plans for the consumer, attracting more end users to the iPhone. As alternative products, such as the new LG Dare, have also teamed up with exclusive providers, Apple will be able to exploit its new open market provider strategy to maximize full potential benefits.

Table of Contents

2.2 Internal – VRIO Analysis 8

Value 8

Rarity 9

Imitability 9

Organization 9

6.2 Human-Machine Interfaces 17

6.3 Efficiency Factors 18

6.4 Accessibility Features 18

1. Strategy Identification

Mission Statement

In 1976, Apple Computer, Inc. was established and was incorporated in 1977. Apple’s first product was the Apple I which began the personal computer revolution. In 2007, Apple Computer, Inc. changed their name to Apple, Inc. They made this change because they shifted their focus from only producing computers to producing other products for industries such as entertainment and mobile telecommunications. The current mission statement for Apple is as follows:

Apple ignited the personal computer revolution in the 1970s with the Apple II and reinvented the personal computer in the 1980s with the Macintosh. Today, Apple continues to lead the industry in innovation with its award-winning computers, OS X operating system and iLife and professional applications. Apple is also spearheading the digital media revolution with its iPod portable music and video players and iTunes online store, and has entered the mobile phone market with its revolutionary iPhone. (Investor Relations, 2008)

This case analysis is going to focus on last part of the mission statement: the iPhone industry of Apple.

1.2 Key Issues with the iPhone 3G

Back on June 29, 2007, Apple officially entered the mobile devices and telecommunications industries with the release of the first iPhone. This last summer, the second edition was released, the iPhone 3G. Since the release date of the iPhone, Apple has faced several issues and problems with its product. Some of the issues that the Apple is facing are the cost, battery life, 3G connectivity and the service provided by AT&T.

Cost

When the original iPhone was released, the sales price for the phone was $399. The biggest portion of Apple’s marketing campaign for the release of the second generation iPhone was that the phone was going to be half the size as the original phone and also half the price. Only the former came true according to researchers. These researchers found that the iPhone 3G did cost half the price as marketed, $199, but there was a catch. With the lowered price, AT&T increased the data package cost by 150%, or from $20 to $30 per month. In addition, he new iPhone service did not include an SMS, or text messaging, plan. The first generation iPhone package came with 200 complementary text messages per month. To make up the difference between the old and new SMS packages, it will cost you $5 per month. As these extra costs do not seem like a large issue, the data plan for the second generation iPhone costs $160 more over the necessary two-year contract with AT&T. The table on the next page shows the price difference between the original iPhone, the iPhone 3G and their closest competitors (Chen, 2008).

(Chen, 2008)

As can be seen from the table, the iPhone 3G would cost $1,975 after two years as compared to the $1,815 with the original iPhone. This change in the coverage AT&T has inflicted has made a liar out of Apple’s advertising campaign, as the new iPhone is actually more expensive then the original iPhone.

Battery Life

Another issue which relates to most Apple products and also relates to the iPhone is the battery life and replacement options. In most cell phones, like Blackberries and PDAs, the battery can be replaced by the consumer. With the iPhone, when the battery eventually wears out, the consumer has to send the phone in to Apple’s headquarters to have the battery replaced. The charge for this service is $79 plus shipping and handling which costs $6.95 (Battery Replacement, 2008). According to the Verizon Wireless website, the cost to replace a battery for any model of the BlackBerry costs $39.99, a difference of $45.96 (Standard Battery, 2008). This is another hidden cost which the end user will have to deal with after 400 charges of his/her battery.

With the new slick and slim look of the iPhone, they have lost valuable space for a more powerful, long-lasting battery. When using the high-tech services such as 3G connectivity and other functions, the amount of battery time decreases significantly. If the user of the iPhone has their 3G function turned on, the phone only has 5 hours of talk-time or 5 hours of internet use before the phone will need to be charged. If the iPhone is in standby, the battery will last up to 300 hours but if a businessman or woman is traveling and needs to access email and other information from his or her phone, they will need to bring a charger with them even on a day trip (Battery Replacement, 2008).

3G Connectivity and Service

The iPhone 3G has been having issues with its ability to connect to the AT&T network towers in the U.S. According to iPhone Atlas, “The root cause for the phone’s reception issue has not been exactly identified, but many are saying that the problem is with the relatively new Infineon Technologies chip set used in the iPhone 3G” (iPhone 3G Connectivity Failure: Roundup, 2008). Apple tried to resolve these issues with releasing the iPhone OS 2.0.2 and 2.1 updates but the problems continued. On September 23, 2008, the chief technology officer of AT&T, John Donovan, admitted that some of the issues with the connectivity of the iPhone 3G had to due with the AT&T 3G service as it was “unprepared for the US success of the iPhone 3G” (iPhone 3G Connectivity Failure: Roundup, 2008).

AT&T’s Monopoly over the iPhone

In the United States, AT&T has a monopolistic advantage over all other mobile telecommunication companies as Apple and AT&T have signed a contract which made AT&T the exclusive carrier of the iPhone. In the beginning of August, Apple and AT&T extended their allegiance through 2010 (Dannen, 2008). There has been much speculation as to why Apple would choose to make an exclusive allegiance with AT&T. Many possible customers who are interested in investing in an iPhone are unwilling to give up their service with other providers whose service they value more, such as Verizon wireless. As a result, Apple’s sales of the iPhone have failed to reach the levels Apple has hoped for. According to the latest estimates as stated by the website Seeking Alpha, the market for ‘unlocked’ iPhones will cost Apple over $1 billion in lost revenue over the next 3 years (Sullivan, 2008). With AT&T’s monopolistic control over the iPhone market, they have complete control over the voice and data package costs as were mentioned earlier, causing the price of owning an iPhone to increase significantly.

1.3 Problem Statement

The previously identified problems outline the challenges that Apple is facing as it enters into a new competitive industry. To solve these issues, an in-depth look at the external threats of the industry and an internal analysis of Apple’s resources and capabilities will be necessary to produce sound solutions which confront current issues and create prohibitive barriers against entry.

2.1 Porter’s Environmental Threat Analysis

Apple competes as a manufacturer in the mobile devices industry, which consists of all analog and digital handsets used in mobile telecommunications. In an industry report conducted by Data Monitor in January 2008, the United States mobile phone industry accounted for $21.4 billion in revenue in 2006. The industry is expected to grow at seven percent annually until 2011, when it is projected that annual revenues will reach $30 billion. However, forecasted U.S. revenues dwindle in comparison to 2011 European and Asian-Pacific market revenues, suggested to be $34.6 billion and $84.8 billion respectively.

Currently, European and Asian-Pacific mobile phone industries continue to generate more revenue. In fact, the United States only accounts for 20.6% of the international mobile phone market’s value (Data Monitor 2008; 7).

However, being a substantial contributor in each major market, Apple has found domestic and international success. Apple has integrated core competencies, such as touch screen capabilities, with successful commercialization strategies to introduce a new generation of phone. A five forces analysis will provide an overview of the industry and help define Apple’s positioning within the mobile phone market.

Threat of Buyers

Network operators and independent retailers are the most frequent buyers of mobile devices in the industry. For these entities, it is necessary to carry the latest fashions in mobile device technology so as to create the most value for end users (Data Monitor 2008; 12). Although network operators sometimes limit the performance of firms through contracts, their bargaining power is limited as success is closely linked to the popular mobile device products. Vertically integrated manufactures that sell directly to the end user, such as Motorola, eliminate buyers from the supply chain and further reduce buyers bargaining power in the mobile devices industry.

Threat of Suppliers

Suppliers in the mobile phone industry provide the raw materials necessary to manufacture phones. Since the hardware and software components are highly specialized, mobile phone manufactures are dependent upon suppliers for quality materials (Data Monitor 2008; 12). Thus, suppliers can inhibit the performance of manufactures by raising the price or lowering the quality of the raw materials provided.

Continually, the revenue generated by servicing the mobile phone industry is a small percentage of total revenue for suppliers because suppliers provide materials for various industries (Data Monitor 2008; 13). Suppliers are able to influence supply contracts, as the mobile phone industry is not a significant figure in their total revenues.

Threat of New Entrants

The threat of new entrants into the mobile devices market is relatively low with the exception of companies that already operate in the electronics industry. For companies interested in competing as new entities, the cost of capital is extremely prohibitive as large amounts of capital would be required to establish research, development and production facilities (Data Monitor 2008; 13). Apple is, however, an example of an electronics company that has expanded its product lines into the mobile devices industry with the introduction of the iPhone (Data Monitor 2008; 13). Apple’s success is attributed to its ability to manufacture an innovative product at a reasonable cost, which could not be attained by a startup company.

Threat of Substitutes

Substitutes to mobile devices include fixed line telephones and voice-over-internet options. However, mobile devices incorporate a multitude of services, which deter users from switching to alternatives (Data Monitor 2008; 13). The threat from substitutes in the mobile devices industry is low, as companies have established barriers of entry for competing products.

Summary of Position

Overall, rivalry in the mobile devices industry is relatively intense because of the increased penetration in domestic and international markets. The rivalry, however, brings new technology to market. Apple, for example, entered the mobile devices market with an innovative product that other firms have come to imitate. Although the iPhone has recently attracted the attention of a large percentage of consumers, Apple is at a disadvantage because of its lack of product diversification. Larger firms with various products appeal to many consumers, rather than targeting a particular segment. But because buyers of mobile devices, both end users and network operators, crave the latest accessories, the iPhone will be in high demand until a better, more advanced product is introduced.

2.1.1 Position Grid

Consumer Price

Cheap

Product Design

Expensive

Basic

Technical

2.2 Internal – VRIO Analysis

To gain competitive advantage over its competitors, Apple will have to look into its internal advantages as well as its external advantages. There are three main internal advantages that Apple has focused on in its design for the iPhone. These three advantages are the Apple brand name, the simplicity of it user interface, and the advanced technology incorporated into its design.

Resources and Competencies

Value

Rarity

Imitability

Organization

Competitive Advantage

Brand Name

Yes

Yes

Yes

Yes

Sustained

Simplicity

Yes

No

No

Yes

Parity

Hardware

Yes

No

Yes

Yes

Temporary

Software

Yes

No

No

No

Parity

Value

The target of the iPhone is to combine the communications ability of a phone with the Internet, data storage, and dissemination capabilities of a computer and the compact and quick access features of a PDA. In addition, they wanted to make it fast and easy to use. Since the introduction, they have added the features of their other products such as the music playback and photo viewing of the iPod. The biggest value here is that the iPhone combines so many things people had to carry with them into one portable device.

Rarity

There are many products competing with the iPhone that are much cheaper. Apple has been using their reputation of providing quality, glitch-free products and the hype of owning Apple products as being a status symbol among young adults to make their product worth the extra money. Unfortunately, they have been failing to provide the former recently as glitches have begun to surface. They have been releasing updates to fix these glitches but just recently, a design flaw was discovered. The iPhone has been experiencing call dropping problems and slow Internet connection speeds and until last week, they had been pointing the finger at the service provider, AT&T. However, the real problem was discovered to be the chip that managed the devices operations (McLean, 2008). This could cause Apple’s reputation to suffer and they could lose some of their market share for a while but since the operations chip is replaceable, this design flaw can be easily repaired in future models. In the meantime, it is likely that the hype of owning Apple products and the simplicity of the phone functions will continue to keep their sales high.

Imitability

There are very few other products on the market capable of providing the features of the iPhone. The new LG Dare is most likely going to be the iPhones biggest competitor (Zeman, 2008). It will be especially tough competition since not only does it have the closest reproduction of the touch screen feature out of the iPhones imitators, but it also has more advanced multimedia capabilities in its camera and video recording equipment. Since the iPhone was designed to do a large number of things well, its competitors are able to incorporate the basics of the iPhone while focusing on improving one aspect and pushing sales on that feature.

Now, Google has released a phone of its own named the T-Mobile G1 (Quittner, 2008). It is expected to give the iPhone quite the run for its money. Though it is a new product and no one can tell how well it will do so early on, it has two features that the iPhone doesn’t have. The first is an open platform for customization. Though Apple has relied on third-party applications for the iPhone, they have to be approved by Apple, which gives consumers fewer options. On the other hand, it also means that the programs Apple releases should be safe to install on your iPhone but they have already lost some of that appeal, as they have had to recall some of the applications they approved due to malfunctions.

The other bonus that the G1 holds over the iPhone is a cut-and-paste function which may not seem like much but to a market that has voiced an interest in it; it can tip the scales out of Apple’s favor. This shows that Google has done a better job of listening to the market.

Regardless of how much it costs to imitate the iPhone, the market demand is so huge that people are willing look at competitive alternatives. In addition, all of the companies attempting to imitate the iPhone have gotten the chance to see Apple’s initial mistakes and can, therefore, avoid them.

Organization

Apple has done an excellent job of exploiting its Brand Name which is its biggest competitive advantage. In addition, it has kept in line with the ideals of its brand name which includes simplistic user interfaces and long lasting, glitch-free hardware, despite the one piece of malfunctioning hardware that is easily replaced in future models. However, Apple is trying to exploit the applications market by forcing their customers to only buy programs that it provides. This is the same tactic Apple used with iTunes and the iPod, only in that case, iTunes was the best and easiest music library application available. In addition, it was free. This same tactic will not work with the iPhone.

Conclusion

The iPhone is highly valued among the cell phone market. New models are highly anticipated to eliminate any problems while keeping the overall design and function simple. Any substitutes that attempt to take away from their market share are generally too complicated and include large numbers of superfluous features. This means that even if other companies add features like a cut-and-paste function, they are not actually adding to the value of their product. However, even though they are struggling to compete with Apple, there is such a huge market for the next generation cell phone that, regardless of the cost to develop imitations, the other big cell phone manufacturers will have to continue to compete for their share of a market that could very well make a good deal of their current cheap, basic cell phones obsolete.

3. Strategic Option Development

3.1 SWOT Strategy

Strengths

Weakness

Strong brand image

Advanced Smartphone technology

Application/update availability

Selective providers

Limited product selection

New entrant stage

International markets

Insufficient network/system

Opportunities

Threats

Niche market

Online capability/options

App Store

Overall pricing control

Product diversification

Immense competition

Superior technology

Dependence on third party suppliers

To successfully compete within a variety of alternative markets, such as the wireless telecommunications market, a company must stick to their core values and strengths in order to generate any sort of financial growth. As Apple continues to expand into the mobile phone industry it must continue to build upon its niche market through its unique iPhone product(s) along with the support of its strong brand image. According to MarketWatch the “iPhone looks likely to be the next step in the convergence of mobile telephone, portable media playback and mobile internet technologies; the device is attractively designed, while also having market leading functionality and usability”(MarketWatch: Global). By linking its MP3 technology with a quality mobile service provider (AT&T), Apple was able to bring a large number of its current customers into its new business venture. The niche market that Apple is striving for involves less product differentiation; unlike its competitors who produce a handful of varied products each year to meet consumer demand. Furthermore, Apple has placed more focus on the creation of a single dynamic, updatable and reliable Smartphone without sacrificing its reputation of creating simplistic user interfaces.

On the other hand by searching for a niche market that requires less product differentiation, Apple has created a possible weakness towards meeting consumer demand. Despite the fact that the creation of a single, dependable device may meet the needs of most consumers, Apple could potentially strike out within the enterprise market. The enterprise market pertains to firms who allow employees to check and send emails, as well as exchange important internal company information to one another via their mobile phones. A common trend of this market has been the “allocation of mobile devices, such as Blackberry, to employees to enable them to check their email and be responsive when they are away from the office” (MarketWatch: Global). The problem inherent with this freedom stems from the enterprise’s need for mobile phone monitoring to ensure company security. At the same time, they must incorporate the employees’ need for customization with their mobile phones for personal usage outside of work. Without the development of a product to compete directly with Blackberry for the enterprise market, Apple will likely see a loss in a very profitable market.

The online opportunities created by the iPhone’s advanced Smartphone technology provide a whole new generation of phone usage and mobility, while offering consumers a new level of personalization with their everyday phone. The key aspect that Apple is bringing to the mobile phone market is their innovative style and technological competencies with user friendly products. Adversely, Apple is entering into a market that is already highly competitive with such companies as Sanyo, Samsung, and LG. Apple can prove to be successful within this competitive market if it is able to stay ahead of the pack with increased developments in online surfing via its mobile phone device. By expanding the online capabilities of its mobile phone, Apple creates a whole new sector to the already diverse telecommunications market. Recently released phones such as the LG Dare and Samsung F700 have shown striking resemblances to the iPhone both in look and function. While these large mobile phone companies continue to trail behind the original iPhone, Apple can address bigger concerns with the current system defects of its 3G model.

The iPhone allows for an extraordinary computer-like experience with a place to upload phone applications as well as products updates in general; the Apple App Store. The App Store is an online department for iPhone users to continually improve and personalized their phone. This service provides consumers with many more opportunities for incorporating the iPhone into their daily lives. Unfortunately, Apple has had little success implementing this aspect of the iPhone in foreign countries. It has had an especially difficult time in Japan. According to Yukari Iwatani Kane of the Wall Street Journal it is “estimated that demand in Japan has fallen to a third of what it was initially and analysts are now expecting fewer iPhone sales” (Kane, WSJ). The decline in sales can be contributed to the lack of information being provided about the iPhone to foreign buyers, the availability of far more advance cellular technology, and an overall lack of any strong App Store presence. The ability to quickly address the issues overseas through the help of companies like SoftBank Corp., an Apple partner, and services like the App Store could mean the difference between victory and defeat for the iPhone in Asia.

Lastly, by selectively choosing its service providers (AT&T, Orange, etc), Apple, is able to effectively maintain a strong control on the pricing of its products. Additionally, by restricting the total number of service providers Apple is able to keep the demand for its products high in order to maximize total profits with limited total costs. Currently, Apple has set its new iPhone 3G at an astonishing $340-$400 price range, which is also accompanied by an expensive service plan. Although, Apple has shown tremendous success thus far there are still immense threats and weaknesses that stem from its suppliers and current service providers’ technological capabilities. From the software perspective Apple is facing a risky business partnership through its service providers as there have been multiple bugs, defects and general malfunctions with the iPhone and its wireless connections. If the issue isn’t address immediately Apple could see enormous losses in consumer satisfaction and trust. In addition, there are perceived threats in Apple’s hardware providers as Apple uses third party suppliers to manufacture its goods. If a sharp increase in demand were to take place, Apple would potentially be vulnerable to a shortage in goods.

3.2 Strategic Option One

Currently Apple only permits exclusive rights to AT&T as its sole service provider. Apple will open up its service options to all service providers. AT&T will no longer be the sole service provider. Therefore, access will be available to other carriers such as Verizon Wireless, T-Mobile, and Alltel, worldwide.

3.3 Strategic Option Two

The iPhone is Apple’s sole product offered in the mobile devices industry. The lack of product differentiation limits sales because the company is unable to meet different customer wants and needs. Therefore, Apple will offer its customers different variations of the iPhone to cater to their personal wants and needs.

4. Strategic Option Development

4.1 Open Market Service Providers

Throughout 2007 and early 2008 Apple reached contract agreements with select service providers granting exclusive service provider rights to its second generation of iPhone, the iPhone 3G. It is our proposal that Apple terminate its current domestic agreement with AT&T, creating an open market of service providers. By making the iPhone available to a broader range of service providers, Apple will increase market share and overall profits through by attracting a larger consumer base.

Additionally, a single service provider limits the introduction of the iPhone throughout the wireless telecommunications services market. As a result, Apple voluntarily minimizes its consumer base and potential revenues.

Furthermore, Apple’s current providers offer insufficient network connections that reduce the quality of the iPhone. According to iPhoneAtlas.com, “the iPhone 3G is capable of attaining higher speeds when linked to networks other than” Apple’s current service providers. For example, its French service provider, Orange, has been proven to be nearly six times slower than other possible 3G service providers.

Although, an open market service provider strategy has many benefits, there are also several trade-offs that accompany such implementation. For example, allowing iPhone to be paired with any service provider reduces the rarity of the product because consumers unwilling to change service providers are granted access to the phone. Also, the open market service provider strategy could reduce the revenue percentage earned from each service plan sold. Currently, Apple is receiving an estimated three dollars a month from AT&T per iPhone user and an additional eight dollars a month for new subscribers (Krazit, 2007). A reduction in these revenues could adversely affect Apple’s net income. Overall, despite potential drawbacks, the open market service provider strategy provides sustainable solutions to current problems.

4.2 iPhone Differentiation

The iPhone is only customizable through its downloadable applications, which must be authorized by Apple The authorization process is time consuming and limits customer’s options. The Google phone, however, provides an open installation forum for installing third party software that provides limitless options for end users (Quittner, 2008). Since Apple declines some third party software, the applications that are finally released to end users are supposedly safe. However, as previously mentioned, this process has introduced applications which had to be recalled. The best solution to this problem is to authorize particular software developers rather than the applications themselves. The endorsement of various software developers would increase competition and quality of programs offered, giving the end user a wider variety of customization through downloadable applications. Also, increased competition between software developers would prevent any class action lawsuits claiming that Apple is being monopolisti