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1 Apple Inc. NASDAQ: AAPL Porter’s Five Forces
Porter’s 5 Forces is one of the most recognized frameworks, used to assess the competitiveness and attractiveness of a particular company and its industry. Named after Harvard professor, Michael E. Porter, this framework identifies five forces that can help investors identify opportunities and threats within an industry. The 5 forces are: threat of new entry, supplier power, buyer power, threat of substitution and competitive rivalry. While Porter’s is good at examining a company’s strengths and weaknesses, it’s only meant as a starting point and may not be predictive of the long-term. 2 What is Porter’s Five Forces?
There is no one official way to score the model. This method is simply a way to categorize companies. Each market force is scored on a spectrum, with high representing the highest threat and low representing the lowest threat. All five forces are then taken together and evaluated holistically on the same low/high spectrum. 3 Scoring Low High Medium
The more players there are, the more intense the competition for the same customers. As companies struggle to differentiate themselves, it’s easy to make pricing the focal point. Apple has avoided price-based competition thus far by staying away from low end markets where price is the main differentiator. Apple products never go on sale. By generating a superior product to the Android phones, rival tablets and eReaders, it compete based primarily on quality, service and unique ecosystem. 4 Competitive Rivalry
The bargaining power of suppliers is determined by the uniqueness of supplier’s products. Apple reduced the power of chip makers by designing its own chips. Apple reduced the power of manufacturers, like Foxconn, by buying manufacturing equipment and only allowing the equipment to be used for Apple products. Apple reduced the power of distributors by taking over retail distribution and product services through the Apple Store. 5 Supplier Power
In general, the more customers a company has, the less bargaining power each customer will have. And if switching costs are high, then buying power substantially decreases. Apple keeps switching costs high by keeping critical products features same and easily transferable among devices, i.e. contacts, calendar, Pages, Numbers, iCloud, iPhoto, iMovie, iOS To increase Apple’s stickiness, the company carefully broadens its innovative product flow. (From iPod to iWatch, but always on iOS). 6 Buyer Power
In order to succeed against Apple, new entrants have to find a way to offer better products at more affordable prices. Apple has a strong brand image, innovation and customer service –making it difficult for new entrants to compete against. Tim Cook’s supply chain expertise is a great defense against low end disruption from new entrants. New entrants will have difficulty matching or beating the supply chain cost structure. 7 Threat of New Entrants
Not necessarily the same products offered by other companies, but rather different products that satisfy the same need as the products being offered. Apple mitigates this effect by selectively making products which might ultimately replace the MacBook or the iPhones. Ex: wearables and simple, cheaper version of the MacBook 8 Threat of Substitutes
Competitive Rivalry – Medium Supplier Power – Low Buyer Power – Low Threat of New Entrants – Low Threat of Substitutes – Medium 9 Summary