Case Analysis: Apple Inc., 2012

With the requirement of cost cutting and the development of emerging market, contract manufacturing in Taiwan and China became popular. The dynamics are mainly driven by cost components cutting, software and hardware updates, product designing and consumers’ needs. The five forces (see Exhibit 1) that have shaped the industry include threat of new entrants, threat of substitutes products, bargain power of suppliers, bargain power of consumers, and competitor rivalry within an industry.

The industry requires PC companies to invest extremely large capitals in all aspects to gain the scale economies, including tech economy, managerial economy, financial economy, marketing economy and R&D economy.

PC industry also involves lots of patents and rights, protecting innovations and setting up another barrier to entry for the new entrants. Technologies as well as innovation are advancing every year even every month, making the competition in PC industry fiercer. The top five PC vendors control large shares of the global personal computer market. It is really difficult for new competitors to enter the market.

On the other hand, price-sensitive consumers show low customer loyalty, usually have low brand identification and are willing to switch their PC to anther brand or product with limited costs. For example, consumers loved the mini notebooks just because of the low average price. It is also easy for the new entrants to gain the access to distribution channels. Meanwhile, under the fierce competition in the PC industry, the industry profitability shrunk with the average selling prices, which declined by a compound annual rate of 8-10% per year from the early 1990s through 2005.

By 2011, the average PC manufacturers’ net profit margin, excluding apple, was 5%. High barriers to entry and unattractive industry profitability result in the weak threat of new entrantsThe threat of substitutes is increasing with the introductions of new smartphones and handheld devices. Consumer electronics products, ranging from cell phones to TV set-top boxes to game consoles, are the main substitutes for personal computers. For example, smartphones increasingly functioned as handheld computers, allowing users to do emails, visit websites, and manage their online lives.

Also the introduction of tablet computers, such as iPad in 2010, has a huge impact on the PC industry. IPad is popular mainly due to extended functionality realized by different types of apps, initiating a new revolution among tablets. More details can be referred to Exhibit 2. SUPPLIERS: Suppliers to the PC industry fell into two categories: those that made products with many sources, and those that made products that had just a few sources. In the first category, the products include memory chips, disk drives, and keyboards.

The suppliers of products in the first category has limited bargain power because the degree of difference of inputs is low and the supplier switching cost is low, resulting in highly competitive prices. In the second category, the products are microprocessors and operating systems, mainly supplied by Intel and Microsoft (the “Wintel”). Although competition for CPU emerges in the 1990s, Intel remained the market leader with leading-edge technology, manufacturing scales, and a powerful brand. With a lower power, lower performance and lower price, the ARM’s entry to the PC market might affect the bargain power of Intel in 2012.

However, bargain power of Intel is currently high. Almost the same, Microsoft had dominated the OS market since the IBM PC in the 1980s. Microsoft operating systems are used in 90% of computers, giving it substantial bargaining power. PC buyers fell into five categories: Home, SMB, corporate, education, and government. These different types of buyers have different preferences towards PC. The strength of the PC buyers has evolved from the availability of numerous substitutes and fierce competition in PC industry. The switching ost for home and SMB buyers are relative low, while the switching cost for corporate, education and government may be high. PC buyers can access to information easily and are usually price sensitive. With the significant shift occurred in distribution, buyers are no longer dependent on a single channel to get the products. Backward integration is also a factor, contributing the strength of buyers bargain power, since it’s becoming common that people are building their own computer systems. To sum up, the buyers have high bargain power.

The fierce competition among the existing companies is mainly about product functions, cost control, prices and etc. Hewlett-Packard (HP) outsourced most of its production to Asia and lowered its costs. Dell won the second largest market share with its distinct combination of direct sales and build-to-order manufacturing. Lenovo dominates China, the fastest growing PC market in the world. By acquiring Packard-Bell, Acer gained the leading position in Europe. The competitive rivalry is very intense in PC industry. Apple’s Competitive Advantages in PC

Apple was successful in entering in the PC industry in the 1990 because Apple took a first-mover advantage and was the pioneer in taking an easy-to-use computer to market. However, the first-mover advantage disappeared quickly when IBM entered the PC market and fundamentally changed the rules for the industry. In the early 21st century, Apple achieved a second success by creating its competitive advantages with the Macintosh. Jobs’s vision of “digital hub” was very appealing and gave directions to the strategies in the next few years.

Four main changes in the Macintosh established competitive advantages for Apple. The changes include: a new operating system, which cost Apple roughly $1 billion to develop; a new chip architecture, which supports Mac to run Microsoft Windows along with Windows applications and expand its potential capability; a new suite of proprietary applications, which includes programs such as the iLife suite; and the Apple Store. The changes brought Mac with competitive advantages by differentiating its products, providing superb customer experiences and establishing a new distribution channel.

Customers can gain a comprehensive experience in the “digital hub” with faster speed and user-friendly design. Meanwhile, the apple store provided customers exposures to with Apple’s products as well as after-sales services. Better customer experience, integrated functions, and user-friendly design have traditionally been one of Apple’s competitive advantages in personal computing. However, the competitive advantages are not sustainable without innovation. The competitors will follow up very quickly by imitating the strategies. For examples, Microsoft also opens stores and exposes its customers to its products.