Apple Inc.: Business Environment - Term Paper Example

Apple Inc Business Environment Introduction This paper discusses the analysis of Apple Inc. (NASDAQ: AAPL) in terms of its external and internal business environment. The analysis begins with an elaborate PESTEL (Political, Economic, Social, Technological, Environmental and Legal analysis) analysis that examines all macro-environmental factors that influence Apple’s overall business strategy. Thereafter, the Porter’s Five Forces Technique was applied to examine the industry and market segments in which Apple operates to gain a thorough perspective on the firm’s competitiveness and position in the market. Finally, the Porter’s Value Chain Analysis was applied to understand the internal activities that provide Apple its competitive advantage besides creating shareholder value. PESTEL Analysis Political Apple’s market extends across several countries and is subject to various political and legislative regulations in every country where it has a market presence. In some ways, these political forces have either restricted the growth of Apple in a particular market or have aided it by providing further opportunities. Grant (2005) says that political entities such as the North American Free Trade Agreement (NAFTA), the European Union and other regional frameworks have allowed Apple to expand beyond the United States into new markets in Europe, Australia, Asia and Latin America. The pattern of growth in Europe, Australia and Japan has been phenomenal as Apple has managed to upstage traditional players like Nokia and Samsung in the Smartphone market through its ‘iPhone’ product (Nazarian, 2009). It must also be pointed out that Apple relies extensively on securing intellectual property and patents from external parties for developing and launching new products or enhancements to existing products. Unknowingly, the company may infringe upon other patents, which calls for a focused effort from Apple to identify and avoid such occurrences. Economic Due to the global financial crisis of 2008, consumer spending, especially in the United States (US), has gone down as people have been affected by the slow economy and the lack of credit (Gitman, 2008). However, efforts by the US government to increase government spending and resurrect the financial markets are starting to yield results and the economy has been showing signs of recovery since 2010. It is expected that the continuance of this trend will encourage more consumer spending and pave the way for more investment by Apple in developing new products. However, weak economic conditions have continued to exist especially within the education sector in the United States. Many states are experiencing huge deficits in budget, which may hamper Apple’s sales initiatives within the educational sector. Most of Apple’s products and components are manufactured in factories across China through partnerships with suppliers and electronic parts manufacturers like Foxconn and Inventec (Housden, 2008). The fixed exchange rate regime adopted by the Chinese government is adversely affecting any effort by Apple to cut production costs, adding to the problems faced from tariffs and anti-dumping penalties (International trade regulations). Social The use of computers, laptops, Smartphones and music players is growing worldwide, especially in the emerging economies. This presents a good opportunity for Apple to widen its market reach especially within these new and relatively unexplored markets. Customers are more adept at using these electronic devices and the use of social networking sites like Facebook and Twitter has only enhanced the importance of computers and Smartphones for daily use (Aasend, 2001). Further, today’s generation places high value on education wherein strategies like offering discounts on products to students are helping Apple capture consumers from an early age and ensure their long-term commitment and preference for its products. Traditionally, Apple has always competed with Microsoft especially within the Operating Systems (OS) segment. Although Microsoft has been a predominant leader in this segment, the launch of iTunes in 2001 proved to be a strategic and financial success for Apple (Imbimbo, 2008). iTunes expanded the customer base of Apple to virtually all PC (Personal Computer) users although it only had a 2% share in PC sales (Nazarian, 2009). Today, iTunes is the largest online music store in the world and reports over 7 billion music downloads since inception. Technological Technology related to computers and electronic devices is evolving at a rapid pace. Important activities including communications, business transactions and banking are now conducted through the Internet. The increasing availability of the Internet and its expansion into developing countries (especially rural areas) widens the potential market for Apple. The desktop is expected to become outdated and be replaced by portable devices like laptops and tablets in the future (Grant, 2005). Products like the MacBook series (Apple’s laptop series), iPhone (including the recently launched Appstore which sells applications that can run on this Smartphone) and the iPad (a tablet from Apple) are being supported by a global network of software developers who are developing new applications that can be hosted by these devices thereby extending their reach and utility (Imbimbo, 2008). Today, an iPhone user can access any service ranging from email to banking using the device, a phenomenon that is expected to continue in the coming years. Apple marketing strategy is driven by product differentiation and is based on high quality and style. While competing manufacturers like Dell and HP strive to price their products below the $1000 threshold, Apple’s Macintosh computers have traditionally been expensive and of higher quality. However, products such as the MacBook Pro, priced at over $1900, have been so popular that Apple is struggling to cope with the demand (Nazarian, 2009). Environmental Being a manufacturer, Apple has the obligation to restrict the environmental impact of its products and reduce its carbon footprint. Apple has taken various measures in this regard such as reducing the use of harmful chemicals in production, using recyclable packaging and enhancing the energy efficiency of product components. Packaging used for the iPod and iPhone is entirely recyclable and consists of 95% biodegradable fibreboard (Gillam, 2008). This packaging is also lighter by almost 45% thereby having an indirect effect on reducing transportation and storage costs. Most components used in Apple’s products are designed using power efficient architectures. For instance, the USB adapter for the iPhone has exceeded the Energy Star qualifications and has an overall efficiency level of 75% (Gillam, 2008). Legal Apple faces the constant threat of legal action by introducing new products and technologies into the market. For instance, Apple settled with Microsoft in 1997 over apparent similarities between Macintosh’s and the Microsoft Windows’ audio-visual platform. Sometimes, legal action can come from unusual entities like in the case of Apple Corps (owned by the popular music band - Beatles), which sued Apple for using the band’s logo on the iTunes store thereby violating an earlier agreement (Griffin, 2007). The case was won by Apple Inc., making the Beatles’ albums available on iTunes ever since. Apple invests heavily on Research and Development (R&D) to maintain its competitive advantage over rivals (Dale, 2009). It has constantly initiated legal action against popular websites like appleinsider.com for disclosing proprietary information and infringing upon non-disclosure agreements (Griffin, 2007). Porter’s 5 Forces Analysis Apple’s business operations extend across two major industries: Computing – Hardware manufacturing and Software Development Entertainment devices and Online Media. Apple has always encountered stiff competition from both these industry segments. Rao (2006) says that Apple has always had issues maintaining a competitive and sustainable position upon gaining a lead by introducing a new product into the market. The application of the Porters Five Forces technique explains the reasons behind the competitiveness within the industries in which Apple operates. Threat of the entry of new competitors Several rival companies are developing competing products and software to counter the gains made by Apple through the introduction of products like the iPod, iPhone, iPad and MacBook over the past decade. Google is vigorously promoting the Android platform as a competitor to the iPhone OS (IOS) in the Smartphone market and is marketing it through phones manufactured by HTC and LG Electronics (Nazarian, 2009). Amazon is working on On-demand online services similar to iTunes that allows users to purchase and download music. Even the Podcast market promoted by Apple is facing stiff competition from VCast, a solution from Verizon for streaming audio and video (Guinn, 2008). Intensity of Competitive Rivalry While Apple’s constantly innovated to maintain a sustainable competitive advantage, there is still a long way to go before the Macintosh Operating system can overcome the dominance of the Windows platform. The open source community has always promoted the use of the Linux OS while online music services like Rhapsody are offering online music at competitive prices (Mohr, 2009). Apple has however consolidated its position in the online music market by securing long term agreements with several prominent record labels. Threat of substitute products and services While online music is nothing short of a revolution, Apple faces a major threat from substitutes in this particular segment. Products like PS2 (Playstation from Sony) and Xbox (from Microsoft) have evolved from mere game consoles into full fledged products capable of offering entertainment and music. Record labels continue to release music through CDs and DVDs as they still constitute a major portion of their revenues (Guinn, 2008). Cable and Satellite services continue to be the preferred choices for watching video. Thus, it is evident that while online music has become extremely popular, it has not attained the position to replace any of the mediums discussed above. Bargaining power of customers Perhaps the biggest threat to Apple’s business growth stems from the illegal sharing of music and software developed by the company. For example, ‘Office for Mac’, a Macintosh version of Windows’ popular Office suite, is available for download from several illegal sites for free (Richard, 2008). This not only encourages customers to prefer alternatives to purchasing the product from Apple but also propagates the availability of new software through these peer-to-peer sharing networks. Apple may not be able to sell products at higher prices than its competitors in the future if there is pressure from its distributors and retailers. Bargaining power of Suppliers Apple faces a high degree of threat from many of its suppliers due to various reasons discussed below. The company currently has contracts with the ‘Big Five’ companies of the music industry – Sony, Warner, Universal, EMI and BMG – and sources a large part of its music from these labels (Gitman, 2008). There is always a constant threat that these big labels may break Apple’s hugely popular model of ‘dollar per song’. In fact, Gassee (2007) states that some of the record labels resent this distribution model as they believe that the profits shared with them through the sale of online music are sparse when compared to the revenues generated by sale of the iPod. Porter’s Value Chain Analysis To identify the distinctive capabilities of Apple Inc through an appropriate framework and to understand internal business environment, the Porter’s Value Chain Analysis has been used. Apple is mainly engaged in Design, Manufacturing, Marketing and Customer Service (Richard, 2008). Each of these activities is elaborated below: Product Design The notion of developing new technologies and products stems from Apple’s early days when it designed the first personal computer (Apple I) as well as the first digital spreadsheet (VisionCalc) (Nazarian, 2009). Since then, the conception of new ideas and their successful transformation into profitable products and services has been the hallmark Apple’s success. In this context, Ireland (2008) argues that Apple innovates not to be the first, but simply to be the best. The Macintosh Operating system is considered to be much more stable and faster than Windows while the company’s desktop applications like iTunes and iPhoto have garnered widespread reception and admiration across the world (Imbimbo, 2008). Manufacturing Apple has always maintained strict proprietary control over its product offering as well as the source code of its software. Thus, the manufacturing model of Apple bundles both hardware and software as the final product. Apple was also the pioneer in migrating to the much faster and reliable 64-bit architectures and introduced the concept of intuitive multi-touch operation through the iPod, iPhone and recently the iPad. According to Richard (2008), Apple considers manufacturing as a natural extension to technology and product design. Marketing and Sales The best salesperson as far as Apple is concerned is its CEO (Chief Executive Officer), Steve Jobs. Mr. Jobs is actively engaged in new product development within his company, coordinates its marketing campaigns, and unveils new products at popular exhibitions and conferences (Gillam, 2008). Apple has also realized the importance of collective growth in the digital industry and maintains numerous technology agreements with rival firms like Microsoft and Sony (Griffin, 2007). A primary reason for this new strategy was the shrinking market for Apple’s PC products including the Mac until the early 2000s. Since then, Apple has profited immensely through such partnership and considers this strategy as an effective way to contain competition in the market (Griffin, 2007). Customer Service While introducing attractive new products like the iPod has proved important for Apple’s rise and success, the company’s financial fortunes and dominance are also based upon providing technologically superior products to customers. In fact, updates and bug fixes for Apple’s products are available more frequently than competing firms and often occur without the active involvement of the user (Dale, 2009). Apple has also taken note of the popularity of the Windows OS and has made some changes in the hardware platforms of its Intel-based Macintosh products to run the OS. Such efforts help maintain good customer satisfaction as Apple’s customers have generally received much more than they expected in terms of customer service. Conclusion The preceding sections discuss the far, near and internal business environment of Apple Inc. Apple currently faces several issues that it must focus upon in order to ensure sustainable growth in the future. The firm must engage in its current strategy of licensing and strive to improve the economies of scope between personal computers and electronic media. Thus, the need for Apple over the coming years is to evolve into a learning organization. Besides licensing and partnerships, Apple can also consider the possibilities of joint ventures with other companies, which will allow it to develop various additional competencies. Apple’s primary strategy should be directed towards developing media-centric technologies and products. Nevertheless, the company should also work towards improving its computing products. In fact, Computer sales accounted for over 40% of Apple’s revenues in 2008 (Nazarian, 2009). Apple continues to rely on the leadership and vision of its CEO, Steve Jobs. Mr. Jobs holds a considerable equity stake in the company and is one of the main reasons behind Apple’s resurgence from virtual oblivion. The reaction from the markets and consumers if he were to ever step down is rather uncertain. Therefore, the dependence on Mr. Jobs should not be a limiting factor for Apple and the firm must devise ways to operate as an organization. Such an initiative will allow Apple to strengthen its position and act through collective decision-making. References 1. Aasend (2001), Business Builders in Computers. Oliver Press. 2. Dale (2009), Computer Science Illuminated. London: Jones & Bartlett. 3. Gassee (2007), The third apple: personal computers & the cultural revolution. Berlin: Harcourt Brace Jovanovich. 4. Gillam (2008) Steve Jobs: Apple & iPod wizard. ABDO. 5. Gitman (2008), The Future of Business: The Essentials. New York: Cengage Learning. 6. Grant (2005), Contemporary strategy analysis. New York: Wiley. 7. Griffin (2007), Fundamentals of Management. New York: Cengage Learning. 8. Guinn (2008), Advertising and Integrated Brand Promotion. New York: McGraw Hill. 9. Housden (2008), CIM Coursebook Marketing Information and Research. London: Butterworth-Heinemann. 10. Imbimbo (2008), Steve Jobs: The Brilliant Mind Behind Apple. Chicago: Gareth Stevens. 11. Ireland (2008), Understanding Business Strategy: Concepts and Cases. Chicago: Cengage Learning. 12. Mohr (2009), Marketing of High-Technology Products and Innovations. Jakki Mohr. 13. Nazarian (2009), Apple Computer Company: a strategic analysis. London: Routledge. 14. Rao (2006), Analysis For Strategic Marketing. New York: Pearson Education. 15. Richard (2008), Telecommunications and business strategy. Boston: Taylor & Francis. Read More