Porters 5 Forces analyses how factors outside an industry influences the nature of competition within the industrial network of companies. The interaction of forces in a business environment influence the way in which industrial firms compete, hence the profitability of an industry can be largely dependent on them. The strategy formulation of any business however determines which of the forces is most crucial to its growth and competitive advantage. Although the five forces have been famed for business analysis, Michael porter further empowers analysts by the provision of his three generic types of strategies commonly used to achieve and maintain competitive advantage. These generic strategies are:-
Fig.1. Generic Strategies in respect to Apple
It is usually accepted that firms with high market share were successful because they pursued a cost leadership strategy. However other firms gain profits although with low market share, by using market segmentation to focus on a small but profitable niche.
The cost strategy is frequently the first to be implemented by most organizations. Apple unfortunately is not the leader in its target market as regards to product cost leadership. Due to Apple’s initial financial constraints, before Steve Jobs regained position as the CEO, Apple did not have the luxury to regain its market share through cost advantages. One of Apple’s largest competitors, Dell’s greatest strength is its ability to drive down costs. It has almost perfected cost control and hence has enjoyed a tremendous advantage over Apple in appealing to the cost-inclined consumers.
Though Apple has not met market demands in implementing cost strategies, its biggest driver is its innovative use of the differentiation strategy. Apple prides itself on its innovation and gained its recent and growing profits mainly through Product differentiation. Steve Jobs applied the founding theory of “user-friendly and personalised computers” as well as his innovative knack to the resurrection of Apple from its sinking ship shortly after returning in1998.
Product differentiation is a viable strategy, especially if the firm exploits its conceptual distinctions. In the case of Apple these are product features & mix, and its reputation as an innovator. Apple’s product differentiation strategy saw the release of highly innovative products such as the personal computer lines ;Power Macintosh, Power Book, iMac MacMini , PowerMac G5 ,the introduction of the iPod digital music player, the iTunes music site, more applications such as the iDVD, iMovies, iPhoto, iBook; the Apple cellular phone- iPhone, peripherals and other software were all products of the new masters of innovative product differentiation in technology( see Fig.1 ).This continuous application of the differentiation strategy will move Apple to maintain and possibly increase it competitive advantage over its competitors.
Fig.3.Examples of Differentiation in Apple Products
Differentiation has also created a stronger entry barrier to Apple’s competitors due to its perceived uniqueness and high satisfaction enjoyed by its present customers. A product differentiation strategy should not only be economically valuable but also be rare and difficult to imitate. Apple has mastered this to a large extent and has utilized it to spearhead its current advantage on the markets.
It is worth noting that Apple’s success in utilizing product differentiation is quickly catching on as Dell, one of its major competitors has began diversifying its product line into consumer electronics. Apple however still maintains its position as the market leaders in this aspect.
In Porter’s generic strategies, the use of focus groups is another way to gain a competitive advantage. Apple, after Job’s return, implemented cost saving measures, by determining the core competencies, streamlining the firm to those core product lines and cancelling out the products that were running at a loss.
Apple’s decision to concentrate on two markets: consumer and professional was the herald of its profit making venture. The professional series (which had the prefix-“POWER”) of Macintosh computers such as the Mac desk top series- “Power”Mac , the “book” laptop series -“Power”Book and the consumer series of products (with the prefix “i” ) such as the iMac, iBook series, the iPods and others. Apple has developed the core strength of understanding its consumers and developing products to enhance their “digital lifestyle”. This is the key to Apple’s success in today’s markets.
Forming Strategic alliances is currently a business concept that is changing the structure and dynamics of global competition. In today’s business environment, creating sustainable value for stakeholders and gaining a high competitive advantage requires creating profitable, effective and efficient alliances. Strategic alliances offer companies a way to access new markets, expand and obtain new technologies relatively fast.
It is said to be an agreement between two or more organizations to cooperate in a specific business venture, such that each organization benefits from the strengths of the other, and gains an overall competitive advantage in its current and future markets. Strategic alliances are critical to organizations for a number of key reasons:
1. Most organizations’ required rate of growth cannot be met easily without forming alliances
2. Increasing complexity and frequency in customer demand for innovation
3. Costly and constantly rising research and development costs can be defrayed by forming alliances.
4. Fast and easy access to global markets.
5. Supplementing and sharing critical skills
The underlying factor to all these reasons is to gain a high competitive advantage in consumer markets. Strategic alliances are increasingly the means to building a bigger and better business.
Alliances come in all forms but have the same essential platform in common for engaging in this strategic decision: the belief that as members of an alliance, each side will achieve its high targets that otherwise may have lay beyond their reach. Lucrative benefits from engaging in an alliance can be gotten without sharing ownership of the individual firms; however, the key to its success is sharing data and communication channels. The basic consideration for an alliance to provide the best advantage for the firms involved to understand the vision for the particular alliance and to merge it with each individual organizational strategy.
The alliance must always be a win-win situation for all parties involved. Each member of the alliance should be equally charged with making the alliance successful. In effect, an alliance will not work if one side takes advantage of the other.
Highly performing firms in recent times have been known to be extremely keen on joining forces with both direct competitors and “complementors”. This was noticed when customer surveys showed that certain customers valued some products more when they have another firm’s (“complementor”) product rather than when they have just one product alone (Barry J.Nalebuff and Adam M.Brandenburge).
In forming alliances, inadequate strategies are the most common cause of failure. Alliances are risky, not only because of the amount of cash outflow from each firm, but also due to expected returns which could be denied. There are a number of risks involved. Examples are:-
Sharing of future profits with competitive alliance partners thereby increasing their profits
Foreclosure of more profitable opportunities due to current alliances
Alliances can cause barriers to future financing opportunities
Distractions from path to achieving strategic goals of the firm
Creation of new competitors or a potential competitors
Unexpected Disappointments from alliance partner
There is a high investment of time and resources in establishing and managing the alliance as well as resolving probable occurrence of conflicts of interest. All these are risks stated above can be faced by Apple in its alliances with Microsoft and IBM.
A high risk faced by Apple in its alliance with IBM was the creation of the “Power trio” PowerPC alliance intended to neutralize Intel’s monopoly in the manufacture of processors. However because neither IBM nor Apple could develop enough volume especially in sales this proved to be a disappointment. However, even though Apple already had an alliance with IBM, due to the pressures faced from its customers, it ventured into yet another alliance with its competitor Intel. Apple then had to back-peddle and forge a new alliance with Intel after which it decided that future Apple products and its operating systems would employ Intel’s Pentium processors to assist in meeting demand.
This goes to show that in forming strategic alliances, it is highly risky and may cause firms to experience losses instead of rising in the market share.
On January 8, 2004, HP and Apple announced a strategic alliance to deliver an HP-branded digital music player based on Apple’s iPod and Apple’s iTunes digital music to pioneer an online music store to HP’s customers. As part of the alliance, HP consumer PCs and notebooks will come preinstalled with Apple’s iTunes software. This came as a surprise to all due to the fact that HP was known to be a large power house after its merger with Compaq on May 3, 2002. This also created the advantage of economies of scale to H.P. on the electronic market. This alliance may seem risky due to the probability that Apple may lose part of its PC consumer markets to HP which already commands a large percentage of the market. A risk Apple, may face, in its alliance with IBM, Intel etc, is the risk of exposing itself to its partners, and the unique technologies that it has. There is no guarantee that these partners-previously and currently still competitors- won’t utilize the fruits of the alliance or the know-how better than Apple itself due to their sheer size and their advantage of their economies of scale.
Although a material part of the costs of alliances may be have been forecasted during prior negotiations, in many cases there are changes in the balance of power between parties during the lifetime of the alliance. In such cases Apple must exert caution as most of its alliances are with larger more profitable organizations. Another risk is the risk of sabotage or disclosure of confidential information to unsolicited parties thereby causing unpredictable damage to the firms in question. It is therefore necessary to terminate all agreements amicably and favorably. It is necessary to properly define how to terminate alliances in the event of a change in circumstances or in the event that targeted expectations are not realized.
It is said that it is as important for a firm to work with its competition as it is to beat them. This is the practical application of a theory cited by Nalebuff and Brandenburger as the ‘game theory’. The theory holds (irrefutably) that a firm and its competitors form part of the same ‘business system’: that system is their shared ‘game’ and each firm is a player in the ‘game’. At the genesis of Job’s come-back to Apple, he forged a surprising relationship with Microsoft. This included releasing a Macintosh version of Microsoft’s popular office soft-ware. At that point Apple needed Microsoft as an ally more than as a foe. This has boosted sales of Apple into markets that were previously monopolised by Microsoft. It is imperative to understand that the success of strategic alliance depends mainly on trust, commitment, and coordination. Strategic alliances have become an important source of competitive advantage for organizations and have given those firms tools to aid in coping with increasing organizational and technological complexities in markets worldwide.
(ANALYSING PORTERS FIVE FORCES with respect to the Apple case)
There are various analyses and tools such as SWOT, PEST, PWOT analysis that can be used to discuss the competencies and resources of Apple and its sustenance of a competitive edge. The author however, has decided to implement the use of Porters five forces in the discussion and thereby help in finding strategies to help it maintain or increase its competitive edge over its competitors. Porter’s five forces simply acknowledge that profitability of a business can be affected by all these micro and macro forces. Understanding the nature of each of these forces gives organizations the necessary insights to enable them to formulate the appropriate strategies to be successful in their market (Thurlby, 1998). A summary of how the forces are applied to Apple is as shown in Fig.2
Fig.2. Apple’s Status regarding the Porter’s Five Forces
Competition in its factual sense is capable of driving profits of businesses to zero. However the intensity of rivalry in an industry helps determine the extent to which the value created will be dissipated when it encounters head-to-head competition. Apple’s top three hardware competitors; Dell, HP and IBM continue to widen the gap in price as compared to the more costly Apple pc series.
The rivalry between Apple and Microsoft is also intense across the software and portable music player lines. Apple being a new player in the cellular phone business also faces stiff competition from well established firms such as Nokia and Motorola. Apple in its existence as an industrial firm has some existing rivalry. Examples are:-
Microsoft Windows OS and media player
MP3 player makers- Samsung and Sony
Online music stores similar to iTunes stores (Napster) etc
Competitive advantage is primarily known to be driven by costs. In implementing any strategy it is best to determine which customers have very specific needs, which are possibly under-served, and capitalize on that defect as an edge to achieving a competitive advantage. Apple’s adoption of this strategy has resulted in brand loyalty which currently lowers its customers’ sensitivity to price. However, in the current global economic crisis, it is imperative that Apple finds ways to drive down cost while improving its value. Though not an easy feat, it will be key to gain a stronger advantage over its competitors.
In today’s technological world, social networking and media have become strong tools to providing access to a mass of consumers easily. Although Apple has its applications running on some Social networks, it can also move into strengthening its links to prominent ones such as Facebook, Twitter and others to integrate some applications into its product line. This will give it a stronger edge over its competitors by reaching multiple i-Application users at once while incorporating their social profiles into customizing some Apple products as well. Apple as a brand is generally strong across the markets. Continuing to appeal to more consumers will increase their customer loyalty as well as increase their market share.
In the analysis of the five forces, entry barriers exists when a newcomer finds immense difficulty in penetrating the industry’s markets; and/or the economics of the industry put the new entrant at a price, cost, profit and market share disadvantage, relative to the existing competitors. Apple, after introducing the NeXT operating system which was supposed to be a vast improvement over the Macintosh operating system, failed due to the immense market take-over by Windows which used the D(OS) operating system. This therefore caused a continual decline in Apple’s profits even after its release. Microsoft made it difficult for Apple to establish its system as a new entrant. In order to prevent any such occurrences Apple must position itself well in making its mission to lead the research and development of new software and products that can penetrate easily into the market as well as enhance the consumer’s digital tastes. This will continue to enable the company focus on bringing new products to the market that will continue to differentiate themselves from their competitors and justify its higher price for value.
In industry supplier power is expected since most sensitive components drive the overall profits of the business Supply of product components in industries are crucial for a firm’s ability to produce in sequence with its corresponding demand. In previous times, production in Apple’s Power PC central processor delayed for two years and faced challenges in meeting demand with supply. It then had to form an alliance with its rival firm Intel in order to meet its demands. To sustain and increase its competitive advantage, Apple must continue to pursue more strategic alliances, especially with other software companies to fuel its innovative applications for Apple devices. Alliances with competitors as well as complementary firms can boost its strength in the markets.
Apple also employs the use of the media as suppliers that drive its music technology empire eg. Sony, Universal, BMG and other media sources used in providing music and videos for i-Tunes, iMovies etc. Due to the sensitivity of its suppliers, Apple must stand against their bargaining power and negotiate accordingly to gain the best out of whichever contract is agreed upon.
Buyer/ Customer bargaining power occurs when they customer dictates the pace of the profit of a business. In recent times, software like Limewire and other free music sharing sites may cause consumers to dictate the cost of Apple’s money maker-itunes. Apple therefore must concentrate on providing value for the customer to prevent the price-beat-down pressure it may face when its consumers demand lower costs. Cost cutting initiatives must also be employed to be able to defray most of the expenses that may drive its potential customers away.
Though many firms may concentrate on threats from rivals, substitutes may pose a bigger threat to Apple in the fast paced technologically advanced market. Apple faces substitution by its consumers through the alternatives to the iPhone and iPods as means to acquire music and videos, (Examples of such substitutes are:- Music CDs, DVDs, Android phones, satellites, Broadcast, Theatres, DVDs etc.). Through the convergence of technologies, cross over devices like the latest cell phones that can access the internet, play MP3s,play games, take pictures and perform a host of other functions, provide a huge threat to the iPod, iMac and other “i” product franchise.
In order to sustain its competitive edge, Apple must ensure that they retain their position as the experts in whichever technology used in their products. The Apple brand must be marketed in such a way as to discourage consumers from substituting its products. “Customer-need satisfaction” was the beginning of the turn-around for Apple as a business entity. It must stand in the face of these substitute products to continue to direct all its products along those lines. Although differentiation is its driving force, the powerful Apple iPhone with multi-functions threatens to cannibalize some of Apple’s own products. Most consumers today may trade the iPod for the iPhone which has added functionalities in addition to the MP3 music players. Apple must continue to find ways to distant the two products and appeal to the consumer on both sides. Customer profiling must be studied and incorporated in its new developments. Again, Apple must continue to invest heavily in Research and Development. The key to its continual success it to keep focusing on its core focus areas :-
1) Professional and consumer based personal computer market share
2) The share of the consumer’s pocket (iPods, iPhones, iTunes etc).
Apple has also expanded its franchise globally. By the end of 2004, Apple had opened 86 retail stores to provide a direct sales outlet for Apple computers and other digital technology to support its products. It was a move in the right direction as net sales in the retail outlets jumped 91 percent to $1,185 million in 2004, accounting for over 14 percent of Apple’s total net sales for that year. The Corporate culture of Apple as innovators and differentiators reinforces its value proposition and will ultimately sustain its success. Apple’s choice to implement a vertical growth strategy by expanding its own retail stores has obviously paid off. The continuous expansion of its retail stores for easy access by consumers will continue to drive its profits even further than that witnessed in 2004. (See Fig3).
Fig3. Examples of Apple’s global retail points ( Source: Apple)
Apple uses its differentiation in products and services as well as its consumer-friendly approach to sustain its competitive advantage and possibly gain more in future times. Combining its market segmentation strategy with its product differentiation will sustain it as the consumer choice. However it must be noted that Apple should be able to prove that it can sustain its growth with or without its current CEO. This will strengthen shareholder confidence in its staying power.
Apple uses a differentiation strategy even in its organizational structure. This is evident in the strategic positioning of experts in each field. Example being:- Avadis Tevanian, Jr. Ph.D.Senior Vice President Chief Software Technology Officer, Bertrand Serlet, Ph.D. Senior Vice President Software Engineering and others who oversee the PC computers , software engineering, applications etc. In so doing, Apple diverts its core functions to specific experts which will ensure growth at each stage.
Apple computers have been known to have a low rate of viruses as compared to its competitor Microsoft. It must capitalise on this advantage and drive it as a marketing strategy. Viruses are the largest threat to security for many consumers as such Apple will gain more of an advantage in spearheading the concept of a Virus-resistant operating system in its computer series.
Apple prides itself in being the leaders in innovation. Its advantage over competition is that it is unique and not easily duplicated.
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