Success of Apple Due to Porters Strategy Theory - Essay Example

?APPORTER Part A History of Apple Apple Computer started in the early 1980s, and was widely known to be one of the first companies to offer a personal computer, along with IBM. The Apple computer that was popularized for public use was the Apple IIE, which saw use throughout the 1980s, and expanded the use of personal computing. The personal computer was well marketed, and Steve Jobs was one of the original founders of the company. Jobs and his friends incorporated Apple in 1977. However, in the 80s, corporate infighting saw the ouster of the original leadership. “In 1985, as the Macintosh division that Jobs headed under-performed but spent lavishly, John Sculley, the CEO that Jobs had recruited from Pepsi, demoted Jobs and made Jobs feel marginalized enough to resign. In 1996, Jobs arrived on Apple's campus for the first time in nearly 11 years, becoming interim and then permanent CEO” (Kanter, 2010). Many commentators therefore separate Apple’s history under Jobs as “Jobs I” and “Jobs II,” with the latter being his re-introduction to the company. Apple, during its early years, was quick to establish a core competence. As one group of authors states, “A company’s core competence can relate to any of several aspects of its business: expertise in building networks and systems that enable e-commerce; speeding new or next generation products to market; good after-sale service; skills in manufacturing a high-quality product; (and) innovativeness in developing popular product features;” these authors also stress the importance of “speed and agility in responding to new market trends and changing competitive conditions; know-how in creating and operating a system for filling customer orders accurately and swiftly; and expertise in integrating multiple technologies to create families of new products.”(Thompson and Strickland, 1997). As the MP3 market expanded in the 90s, Apple was able to take advantage of consumers because of their unique position in the pricing chain in which they must meet the effects of the practice in their business operations, whereas consumers have more of a distance between themselves and perceptions of negative effects on music retailers, which they may be unlikely to see unless the music retailer goes out of business. “We are living through extraordinary times for the music business. One of the great success stories of the 20th century is turning unpleasantly sour in the 21st” (Cook, 2003). From this perspective, it is fairly impressive that Apple has been able to capitalize in a market where it is essentially competing with a free product by putting its own 99 cent downloads up against it, successfully. “Apple has sold more than 500 million songs in 19 countries since it introduced iTunes in the United States over two years ago. While iTunes by itself is not viewed as a big money maker for Apple, it has helped drive sales of its wildly popular iPod portable music player” (Apple, 2005). From this perspective, the service is selling the hardware. Another major issue facing Apple is that if consumers do not see what they want aligned with their needs in a retailer, they are likely going to go someplace else to hire the product they are seeking. “The record companies have never had it so bad. The world is still saturated with popular music, but somehow its very omnipotence has taken the shine off its profitability: as popular as pop stars are, many of us have had enough of them” (Cook, 2003). Porter’s framework applied Porter’s Five Force analysis has achieved wide credibility as a form of industry analysis. Also, some of Porter’s key concepts can be applied to Apple. “The intensity of industry competition and an industry’s profit potential are a function of five forces of competition: the threats posed by new entrants, the power of suppliers, the power of buyers, product substitutes, and the intensity of rivalry among competitors” (Schmalnese, 1985). Porter’s Five Forces model of industry analysis is, stemming rationally from the perspective of theory, a tool that is primarily used by management to assess competitive issues within an industry. Many of the forces are connected and have interrelationships. Using this model to look at an individual company like Apple is sometimes difficult: it is meant more as a holistic industry analysis tool. Porter is seen as an innovator in the field of industry analysis and the economic impact of competition, drawing praise from many and some amount of confusion from others. Under the second incarnation of Jobs, Apple expanded into the iPhone and now, iPad markets, showing a new direction in business which is seen by many to be revolutionary, in its stance as highlighting the intensity of competitive rivalry. “From introducing the assembly line to decentralizing the corporation, from quantifying quality control to stimulating innovation and demand, from computerizing companies to prioritizing human needs, these six individuals in their times had a profound impact on management during the 20th century. Now, on the cusp of a new century, a couple dozen others could carry their mantle” (McClenahen, 1999). Among these others, in this author’s subjective opinion supported with their own facts and rationale, is Porter, for his Five Forces. The basic facts of this influence are hard to deny, because Porter has indeed influenced economics and organizational thinking deeply. This is backed up by the attention that is continuing to be paid to his Five Forces theory, in appreciation of Apple and elsewhere. The facts are that Porter “has asked many CEOs and many companies to take their eyes off their direct competitors and look elsewhere [to] where the competition is really coming from. He would want people to build 'visioning' into their company structure. And I think that is why people love this guy, because he's in real time” (McClenahen, 1999). In terms of the threat of new entrants, Apple does not have as much to worry about as companies in some other industries, because they are making a product that is difficult to replicate, and they are operating in an industry with high entry barriers. In other words, it is relatively easy for a company to make and bottle a juice beverage, and compete, at least locally, against major brands of soft drinks. It does not require that much technical sophistication or investment to do so. To make a competing product to the iPhone or iPad, however, it requires a great deal of time, research, development, and money. High entry barriers guarantee that Apple does not face a significant threat from new entrants. Based on the facts presented in relation to Apple, the main assumption that can be made is that Porter has had a great deal of influence over business and economics, particularly through the Five Forces model studied and referenced, and that this influence continues to impact business and economic professionals even today. This assumption is played out in the quotes of present day business leaders who reference their personal appreciation of Porter. For example, a contemporaneous business leader has stated in the article regarding Porter, “He gives CEOs permission ‘to experiment, to dream, to deconstruct and construct, and permission to move geographically, emotionally, and financially,’ Reiman says. ‘There isn't anyone [else] who has his kind of academic status who gives these CEOs ... the permission to do some of these things’” (qtd. in McClenahen, 1999). Obviously, Porter’s model has inspired many managers, including, possibly, Jobs. In terms of the power of suppliers and buyers, Apple faces reduced threats, because they have established control over their supply chain. In other words, although Apple outsources many of the parts required for its products to other companies, it does so in a way that is advantageous to the company, and does not hurt the bottom line. Essentially, the power of suppliers is limited by Apple, due to its size and technical sophistication, as well as its control over the supply chain. Therefore, this degree of threat is lessened. Unlike other theories of business success such as Maslow, who was a psychologist, Porter has created a method of economic industry analysis coming from the business world and applying to the business world. One other assumption that could be made though is that Porter’s model is an effective way of looking at industries holistically, but may be limited in terms of looking at individual businesses. Nonetheless, this report attempts to give examples of how companies and individuals use and appreciate Porter’s model at each stage in the five-stage analysis. These facts are basically used as support. Although there is implicit criticism of Porter as well in terms of the inclusion of other thinkers who may have revised or disagreed with Porter, such as Christensen, basically the supporting facts in the Porter section are all in support of the thinker. “However, during the past 35 years, manufacturing has had its share of seminal thinkers as well. Among the more familiar names is Harvard University's Michael Porter, who asserts the primacy of strategy in business success. Also at Harvard, there's Clayton Christensen whose notions of managing disruptive technological changes challenges some of Porter's ideas about the constancy of strategy” (McClenahen, 1999). This shows attention on Porter. The main point of the analysis framework developed by Porter is to help managers analyze whole industries in terms of economic strategic environments and competition. His method has become very popular in the present business environment. “Porter argues that while many companies have been preoccupied with improving operational effectiveness--primarily through restructuring and reengineering--that's not enough in an increasingly competitive world. Each company must carve out a distinctive way of competing” (McClenahen, 1999). As noted above, a synopsis of each of Porter’s five forces, including entry barriers, bargaining power of suppliers, bargaining power of buyers, threat of substitute products, and intensity of competition, helps a manager, as mentioned above, find constructive ways to give examples of how the cognizance of these forces is utilized by companies and people. Apple has little to fear in terms of substitute products, but this does represent more of a risk than some of the other forces mentioned in Porter. For example, if someone is unhappy with their iPhone, there are plenty of substitutes that are available to them, and they can switch to a different sort of phone, or a different service provider, relatively easily. This is because Apple works in an industry with a high and intense level of competition. Smart phones are offered by many other major companies, which can act as substitutes for its products. Based on the themes and assumptions, as well as the implicit problems, covered in relation to Apple, this report’s recommendation is that Porter should be categorized in the model recommended, as one of the most influential thinkers of recent years in business and economics. Using Porter’s theories in looking at Apple, one can find them to be relevant and applicable to the business and economic environment of the present. Porter believed that “The nature and degree of competition in an industry hinge on five forces: the threat of new entrants, the bargaining power of customers, the bargaining power of suppliers, the threat of substitute products, and the jockeying among current contestants” (Ireland et al., 2006). Aside from looking at Apple from Porter’s perspective, the report can also examine the business from other perspectives of business strategy, strategic management, first mover advantage, the position of strengths, weaknesses, opportunities and threats in the current external and internal business environments, and Apple as company exhibiting industry structure and company structure alignment. There is more than a little threat in the MP3 player and provision of songs in this industry of substitute products, because many companies have made services similar to those offered by the big companies in this industry for less money. This is somethng that Apple could also take advantage of, however. In the music and entertainment industry, there are often substitute products that come and go with changes in technology. People don’t really listen to eight track recordings anymore, but this was once hailed as the new replacements for albums and tape cassettes. It is always changing, and MP3s are just one example of how this continues in the present. Rivalry among competitors is a problem in the industry, as is shown by the close proximity of competitors to Apple and iTunes, both free and pay services. But by taking advantage of its position as an incumbent to the industry, Apple may even be able to offer substitute products, rather than worrying about this as a competitive obstacle. Instead, it can use its own services as an effective obstacle to smaller and less entrenched companies by cutting the price of its services and offering them in terms of similar marketing, and similar customer orientation and quality. The main problem in the industry Apple is a part of, especially those available as dot-com companies, is that competitors tend to be unequally balanced in this industry, which requires that they build to a large extent within the economy of scale of larger and more dominant companies. This involves the force of jockeying of competition as well as the threat of new entrants. “The closed system prevented independent developers from building more things to make more Apples more useful to more people. Jobs II corrected that mistake in a huge way, matching iPods with the iTunes store and making iPhones all about the Apps. Apple has thus demonstrated the virtues of getting thousands of independent developers and entrepreneurs working” (Kanter, 2010). The popularity of apps and the competitive environment they have created is a good example of Porter’s rivalry among competitors. As noted, Apple is also able to increase its control over supply chains, therefore decreasing the bargaining power of suppliers, and adding to the company’s financial bottom line. However, the threat of substitute products, as also mentioned, is high, because Apple operates within a saturated market. Even though entry barriers are high, there are a lot of companies that have met these barriers, and are competing internationally. Someone who doesn’t want an iPhone, in other words, has options; they can get another type of smartphone. Future strategic options In terms of future directions, Apple under Jobs needs to continue to manage knowledge as a part of continuing growth in operations. “Managing knowledge requires a conscious effort on the part of leaders at all levels of the organization to manage three key knowledge processes: creating, sharing and exploiting knowledge. Transformational leadership theory and transactional leadership theory provide a foundation for understanding how leaders impact the cultivation of knowledge” (Do, 2010). Options to increase diversity of its market share as well as differentiate its products more may be attractive to company managers. “The products released, like the iPod, the iPhone, the Mac, and even the companies software, are innovative in their respective categories with finite market brands. The release and marketing of the company’s products follow a unique method” (Apple, 2010). Strategically, Apple should stick with what works, in terms of effective marketing. Competition means that competitors strive for market position, and seek to compete with Apple in its provision of services like iTunes, and its supply of products like the iPod. This relates to the idea discussed regarding Apple and the industry matching the company and vice versa. By having a good picture of what is going on in terms of opportunities and threats in the external industry, the company can tailor internal operations appropriately and reap competitive advantage, according to this theory. Apple needs to weigh the forces of new entrants as a threat alongside the jockeying of current competitors to see how the industry is going, and where it will be in five or ten years. They need to read the clues right and arrive at the right conclusions about where the industry is headed. From an objective point of view, the competitive threats in this industry externally tend to point towards the suggestion to Apple that their internal business model reflect a lot of dynamism and openness to change, and the ability to reflect and facilitate this change. “Working with this larger mindset motivates people and unleashes creative ideas. People can step out of their own technical work and think about what it would take to change the whole game that is being played” (Apple, 2008). Apple also needs to keep its leadership dynamic, responsive, and charismatic. “Leaders play a central role in the process of managing organizational knowledge. Leaders provide vision, motivation, systems and structures at all levels of the organization that facilitate the conversion of knowledge into competitive advantages.” (Bryant, 2003). Jobs is the face of Apple, in terms of leadership. Although entry barriers are high, Apple faces significant possible future threats posed by new entrants, especially in terms of its products rather than its services (iPods rather than iTunes). The company faces a strong obstacle in the bargaining power of suppliers because music and record labels may choose to deny Apple of their library of stars, affecting the bottom line. The power of buyers is also substantial because of the significant threat of buyers choosing to download music for free over the internet using a p2p type service. It is hard to sell something when the competition offers a similar product or service at no charge. The threat of substitute products is higher again for the iPod than it is for iTunes, but again iTunes still suffers from competition with illegal free-download sites. Also, rivalry among competitors is very high in both the IT industry and the entertainment industry, which make up the industries focused on in the case. “To make intelligent investments within your organization, you need to understand how your whole industry is changing. But such knowledge is not always easy to come by. Companies misread clues and arrive at false conclusions all the time. To truly understand where your industry is headed, you have to take a long term, high level look at the context” (Thompson and Strickland, 1997). It is unclear from the company parameter what the main point of view on the external industry is, so again it is difficult for an external firm to really work from Jobs’ plan. From an objective point of view, the competitive threats in this industry externally tend to point towards the suggestion of the firm that this internal business model reflects a lot of dynamism and openness to change, and the ability to reflect and facilitate this change. In the smartphone and personal computer industry in which Apple is involved, many businesses are very competitive both domestically and globally. The source of this is the popularity of this industry as a services supplier. Many businesses are rushing to invest time and money in networked e-commerce service systems, so as to enhance consumer responsiveness and information access, and also to quicken product delivery time, and Apple’s industry also supplies solution to these problems. The reduction of administrative costs is also a concern, as is the issue of improved efficiency and ergonomics. More than ever, effective industry platforms empower businesses through information management and risk elimination. Although no individual system is 100% foolproof, many companies employ a variety of security options to minimize risk in this competitive business environment. Effective security prevents loss of revenue and time, detects possible fraud and illegitimacy, determines the value of assets, protects brand integrity, and distinguishes leaders and innovators from stability-obsessed reactionaries to technological change. Coming from this initial perspective of core competency, one can also assess the strategy of possessing first mover advantage. “While a core competence is something a company does well internally, what makes it a core competence, as opposed to just a competence, is that it is central to a company’s competitiveness and profitability rather than peripheral” (Thompson and Strickland, 1997). First mover advantage is also about centralizing competitiveness. And Apple is going to have to do this, by not only concentrating on cutting costs, but also ramping up convenience charges to boost initial revenues. “Apple is not just about making money and getting market share--though that is certainly important. But Apple has also been about revolution. Not just building a great computer or phone, but changing the way that people work, and play, and learn” (Three, 2010). Sustaining such a revolution is a challenge, because a company that previously had an outsider image, sooner or later, if it grows enough, becomes an industry monolith, and an agent of the status quo, rather than an agent of change. What Apple has to do, therefore, is keep its image as a revolutionary intact. It is possible that Apple’s advertising managers are exhibiting behavior that blinds them to a dynamic market and focuses them on cost-effective solutions that are less change-based. The franchise hasn’t changed from a single-concept product, even with its multiple lines; it has just expanded. And its leaders are taking credit for a grassroots sort of popularity that seems to be more about how people react to the advertising, than the corporate pitch. Banking on cult-like product followings and the unique marketing angles which this gives a company is fine for as long as it works, but it generally works better with relatively small and regionalized companies than it does with monoliths. Apple’s managers could learn this lesson from taking a close look at what happened to Snapple. Part B Leadership at Apple Proactive leadership works well with systemic change because like systemic change, transformational leadership takes a step back and looks at the problem as a whole, to see how the larger good of the organization is affected by the decision making of the manager. At Apple, Jobs can affect the values of subordinates deeply, if he’s able to inspire them and improve their self esteem, pride, and self concepts through dynamic leadership. This style of leadership also motivates others to look at changes that are being made and that can be made on the systemic level. Leadership has a positive functional definition, but there are also elements of a leadership style that has more negative connotations in the beauty and hair salon industry, that of autocratic leadership. This is not wholly negative, but represents more independence than teamwork or group thinking. For Jobs, product differentiation will be key to continued dynamic leadership. “Differentiation creates a barrier to entry by forcing entrants to spend heavily to overcome existing customer loyalties. This effort usually involves start-up losses and often takes an extended period of time. Such investments in building a brand name are particularly risky since they have no salvage value if entry fails” (Porter, 1980). In an example from the U.S. market, besides generic drugstore brands, there have not been many effective competitors against Band Aid adhesive bandages. Consumers are so used to this brand and have such a high degree of product familiarity with it that many simply call adhesive bandages Band Aids. The same is true in some areas of the U.S. where people call all carbonated sodas Coke, and where similar beverage competitors like Royal Crown are delighted if they approach a very distant third-place in the market. In cases and industries like these, brand recognition is so high that it provides a substantial barrier to a new competitor entering the market. In the case of Apple, brand recognition is something that is going to be an obstacle to the company, because as a relative upstart it is not going to have the sort of trust and recognition from customers that established companies have. In other words, no matter how popular the iPhone is, or how well established the credentials, people are not going to call all smartphones iPhones, or all computers Macs. The object of Jobs’ leadership is that he is going to have to use information technology to help Apple achieve their objectives faster, better, and cheaper. Although no individual system is 100% foolproof, many financial planning organizations employ a variety of security options to minimize customer risk. Effective security prevents loss of revenue and time, detects possible fraud, determines the value of assets, protects integrity, and distinguishes leaders and innovators from stability-obsessed reactionaries. In terms of tactics, Apple should have a strong marketing resource profile that is mentioned and outlined in the marketing analysis. Referring to the figures available during the ultimate marketing audit will give one an idea of the strength of the company in terms of its performance on the public market and the company’s profitability in terms of ratios and increases and decreases in stock price. Overall, Jobs’ experience and connections should make resources plentiful at Apple, although the company is still going to be relatively small when compared to some of the other competitors in its own and associated industries, which are often spoken of in terms of attempts at monopolization. This situation may be difficult for many cost-effective and stable MP3 player industry and smartphone retailing companies to achieve, because in the past they have based performance initiatives on the perception of dealing with change in the external environment while still maintaining a cost-effective internal structure that can be competitive. If companies like Archhos, Creative, Dell, iRiver, and San Disk want to cut into Apple’s strong share and sales of iPods, they are going to have to come up with something innovative that first of all, cuts into the switching costs of iTunes, and second of all, overcomes the barrier of brand recognition that Apple is building. If this is not done, people are going to think of iPods as MP3 players in the way that, as shown above, they think of Coke and Band-Aid. Apple has established a pattern of differentiation which has created a very strong entry barrier to this industry, because if a company starts out and starts making MP3 players, it immediately has to spend tons of money to overcome the brand loyalty and recognition that people have with iPods. The immediacy of this endeavor makes the industry less attractive to the entrant, because this position of having to spend to combat brand awareness may even turn into an interminable struggle with a lot of risk, trying to build a brand name. There is also the tricky issue of illegal downloading which complicates the industry. Another objective concerns the issue of the control of pricing which has been taken from distributors and retailers by the unfeasibility of competing with a similar product that is offered for free. For the legacy of the industry being able to change and react to external factors to continue into the present, both large and small MP3 companies need to be closely aligned to consumer needs as well as being aligned to the concept of not being a self-righteous reactionary to industry change, but rather an agent of change. It may be more tenable for these entities to take a more hands-on approach to change in the external environment by changing this internal structure The protection of intellectual property is not just a place for lawyers to argue, but it was also most likely a primary consideration of the sponsor of the patent in terms of imperatives for the business and industry. This shows dynamic change in the understanding of the issue of business as well as legal expertise, for now, “Honeywell is asking for monetary damages and an injunction to prohibit the companies named in the suit from selling products that infringe Honeywell's patent. With the exception of the CRT-based eMac, LCDs are used throughout Apple's product line; Its iMac, iBook and PowerBook systems all use LCD displays” (Cohen, 2007). Jobs needs to continue product differentiation while continuing to act as a charismatic leader. “Whereas traditional authority clearly is inherently conservative, the rise of a charismatic leader may well change in that system” (Ritzer, 2002). In this setting, “The charismatic leader is free to intervene whenever he or she feels that the staff cannot handle a situation…. A charismatic system is inherently fragile; it would seem to be able to survive only as long as the charismatic leader lives” (Ritzer, 2002). This last statement is then questioned and it becomes clear that a charismatic system can also develop when, “The staff may search out a new charismatic leader, but even if the search is successful, the new leader is unlikely to achieve the same aura as his or her predecessor” (Ritzer, 2002). These paradigms of definition are in the current research compared to the business-oriented paradigm. Business also changes over time in terms of the effective planning that is used by business leaders. REFERENCE Bryant, S (2003). The role of transformational and transactional leadership in creating, sharing and exploiting organizational knowledge. Journal of Leadership & Organizational Studies. Cohen, P. (2007). Honeywell sues Apple, 33 others over LCD patent. Computer World. Cook, R. (2003, April 14). Slipped discs: How the ailing record industry can get back in shape. New Statesman. Heyne et al. (2005). The Economic Way of Thinking. Upper Saddle River NJ: Prentice Hall. Ireland, Hoskisson, and Hitt (2006). Understanding Business Strategy. New York: Thompson. Kanter, M (2010). Apple and the leadership pause. Harvard Business Journal. McClenahen, J.S. (1999). The Most Influential. Industry Week, pp. 61-73. Porter, M.E. (1980). 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