Managerial Economics: Five Forces Analysis of Apple Inc. Report

This report provides a comprehensive analysis of Apple Inc. using Michael Porter's Five Forces framework. It begins with an introduction to managerial economics and the importance of strategic analysis. The report provides a company overview of Apple Inc., discussing its history, business segments, and market position. A detailed review of the Five Forces model is presented, outlining each force and its impact on industry competition. The core of the report is a Five Forces analysis of Apple Inc., evaluating the intensity of competitive rivalry, the bargaining power of buyers and suppliers, the threat of new entrants, and the threat of substitutes. The analysis considers factors such as the aggressiveness of competitors, switching costs, and product differentiation. The report concludes with strategic recommendations for Apple Inc., derived from the Five Forces analysis, and discusses how the company can adapt its strategies to maintain a competitive edge. The report also includes a discussion on the advantages and disadvantages of the Five Forces analysis and how the tool can be improved. The analysis highlights the importance of anticipating changes in the business environment and continuously adjusting strategies to stay ahead of the competition.

Running head: MANAGERIAL ECONOMICS
Managerial Economics
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Table of Contents
1. Introduction............................................................................................................................2
2. Discussion..............................................................................................................................2
2.1. Company Overview........................................................................................................2
2.3. A Review of the Five Forces Analysis............................................................................3
2.4. Advantages and disadvantage of Five Force Analysis....................................................4
2.5. How the tool can be improved........................................................................................6
2.6. Five Forces Analysis for Apple Inc................................................................................6
3. Strategic Conclusions...........................................................................................................11
References:...............................................................................................................................13

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1. Introduction
For keeping the business ahead of the real competition, managers need to continually adjust
their strategies for reflecting the environment in which their company operates (Doppelt
2017). Companies need to anticipate the changes taking places in their surrounding
environment in order to stay competitive and sustain in the business market. Porter's five
forces were introduced in the year 1979 by Michael Porter as a strategy tool that aims
towards analyzing the immediate competitive environment a particular industry (Arshed and
Pancholi 2016). This tool considers some of the specific forces that helps in determining the
competition. It is their impacts that facilitate the economic potential and the competitiveness
of a particular industry. This paper is going to elaborate on performing a five forces analysis
as the basis for forming strategic conclusions for Apple Inc., a multinational American
technology company.
2. Discussion
2.1. Company Overview
Apple Computer Inc. is an American multinational technology company that was
founded in the year 1976 by Steve Jobs, Ronald Wayne, and Steve Wozniak in order to
develop and sell the personal computers in the market (Coccia 2018). Later in the year 2007,
the company was renamed as Apple Inc. for reflecting that its focus has shifted towards
consumer electronics. The company is headquartered at Cupertino, California and earns total
revenue of 233.715 billion dollars as per the year 2015. The company belongs to several
industries including computer software, computer hardware, consumer hardware, digital
distribution, financial technology, and cloud computing.
It is to note that the organisation has managed creating a substantial value for itself in
the modern competitive personal computer industry through innovating and forging a path

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different from the other key players in the industry. The competition is focused on design
elegance, quality, and high quality customer service in the process of outsourcing the actual
manufacturing to the trusted original equipment manufacturers. However, the company is
facing a significant challenge in terms of the stiff competition present within the industry as
well as the other factors in its external environment that presents some formidable challenges
for the company (Vugec, Spremic and Bach 2018). It is to note that the personal computer
market is gradually becoming highly commoditized, and this is leading to some intense
rivalry among the competitors present within the industry. At the same time, it is also driving
the prices down and has led to the creation of potentially destructive price wars among the
players. Under a brilliant stewardship of Steve Jobs, Apple has become successful at
innovating its way towards a more comfortable market position. However, unfortunately, it
cannot rest on its laurels. The strategic objective of Apple is to expand further to ensure broad
market reach.
2.3. A Review of the Five Forces Analysis
Michael Porter developed the five forces model in the year 1979. It is aimed towards
examining the critical factors of competition present within a particular industry (Oneren et
al. 2017). It is to note that the dominant force that is reviewed by this model is the level of
competition present within a sector and its influence on the development of the business
strategy. It is an essential tool for analyzing and understanding the forces that shape the
competitive environment within a particular industry. The tool helps in evaluating the five
effects that are affecting the company, and they include- customers, substitutes, suppliers,
competition, and new entrants. All these forces have the potential of limiting and reducing the
market share of the company along with influencing the revenue, business development, and
profitability. The five effects include the following:

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a) Competitive Rivalry or Competition- It determines the intensity of the impact that the
competitors can have on one another (Hickman and Silva 2018). In a competitive
sector, the companies need to compete very aggressively for their market share, and
this led to low profits.
b) Bargaining Power of the customers or buyers- It helps in determining the way
customers’ buying decisions and the related perceptions and preferences that are
likely to impact the business. It is to note that buyers have the power for the demand
for low prices and high product quality from industry when they have durable
bargaining power (Fabbri and Klapper 2016).
c) Bargaining Power of the suppliers- It demonstrates the influence or the power that the
suppliers hold in imposing their demands on a business or company and its rivalries in
the market. Stronger bargaining power allows the suppliers to sell high priced and low
quality materials to the customers. It directly affects the profits of the firms.
d) The threat of new entrants- It determines whether it is natural or not to enter into the
industry. If it is profitable, and there are fewer barriers to entry, the rivalry is likely to
intensify (Boyd, Royer and Goto 2019).
e) The threat of substitutes- It demonstrates the strength and power of the substitute
products and services in the market in attracting the buyers. It is threatening when the
customers can find their substitute products easily with attractive prices and high
quality.
It is when they tend to switch to other products.
2.4. Advantages and disadvantage of Five Force Analysis
For understanding the concept of Porter’s five forces, below are mentioned the
advantages and weakness of the model:
Advantages a) It helps a company in gauging the present competition level within

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the industry in which it is operating as if the firm operates within a
sector where there is low competition, it could have pricing power
that would further result in gaining good profits.
b) The industries that need huge investments are very complicated as
of the fact that once the company makes the investments, it cannot
back off and by making use of this tool, the company can identify
the power of new entrants and substitutes in influencing the
businesses within the industry. If a player can quickly enter into an
industry, it might result in a competition that would not be
beneficial for the firm. When a firm plan to enter into a trade, by
making use of this tool, it can eliminate the industries that have
close substitutes and the ones with few entry barriers for the new
companies to enter.
Disadvantages a) One of the most significant drawbacks of this tool is that it takes into
consideration the five factors only and it ignores the many other factors
that may have a considerable influence on the business environment in
which the firm is operating. For instance, if a firm is working in an
industry where all the 5 factors that are barriers to entry, the products of
the company are inelastic, and there is weak bargaining power of the
suppliers and no competition and no substitutes either, still the
government has a role to play. If the government introduces any taxes
on the products of the industry or make any amendments on the existing
laws regarding any of the products than the complete analysis will be
useless.
b) The other disadvantage of this tool is that it is not useful for all the

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industries in the same manner. For example, if someone applies this tool
in the sectors like fashion, where other than the five mentioned forces,
taste, technology and other factors also play a crucial role, then this
model might be not that useful and is unlikely to bring the desired
outcomes. Hence, it can be said that this tool cannot be applied to all the
industries alike.
2.5. How the tool can be improved
This tool can be enhanced if there is an addition of sixth force in it and that should be
of the threats of government regulations. As said earlier, government regulations and laws
have a pivotal role to play in the construction and destruction of a company. If the
government introduces any taxes on the products of the industry or make any amendments on
the existing laws regarding any of the products than the complete analysis will be useless.
Also, it would be beneficial for a company who is working on this model to maintain an
analytical frame of mind before beginning the process, during the process and after it has
been completed.
2.6. Five Forces Analysis for Apple Inc.
According to Goyal (2018), Apple Inc. has achieved significant success as being one
of the most valuable firms in the world. Five Forces Analysis will present a clear insight
regarding the external factors that would influence the success of the company. It is to note
that the strategy of Apple is partly dependent on the requirement and required to address the
forces present in the external business environment. All these forces have the potential of
limiting and reducing the market share of the company along with influencing the revenue,
business development, and profitability. It is to mention that the five forces analysis points

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the below-mentioned strengths and intensities of external factors within the industry
environment of Apple:
Competitive Rivalry or Competition- The degree of competition among the key
companies and players who have the potential to compete with Apple directly in the
technology is high. It is to note that this force among the five authorities determines the
intensity of the impact that the competitors can have on one another. In case of Apple Inc.,
this impact is based on some external factors, and they include- a) high aggressiveness of the
companies (strong), b) low cost of switching (strong), c) low differentiation of the products
(strong). The companies like Samsung Electronics Co. Ltd., Amazon, Google Inc., LG, and
Hewlett-Packard compete aggressively with Apple Inc. Like Apple, these companies invest
some notable capital on the R&D (Research and Development) and marketing. Hence, it can
be considered to be as a strong force. With the same, it is also to mention that the relatively
low cost of switching is the other factor that makes the technology highly competitive. It does
not require a substantial amount of investment for the customers to ditch the iPad of Apple
for the Amazon Kindle. They can easily switch to other brands based on assessing their price,
accessibility, function, etc. Moreover, in terms of product differentiation, it is to state that the
products that Apple has in its product portfolio is generally similar to the other available
products in the market and are also fulfilling the specific purposes of different customers. For
instance, there are several application is possible for the iOS and Android devices, cloud
storage services from different brands for iOS users. Hence, this situation creates a powerful
force through making it easy for the buyers to switch to the other providers and sellers
present within the industry.
Combination of these three external factors results to a significantly strong competitive
rivalry that is among the most important considerations in the strategic management of Apple
Inc. However, it should also be mentioned that to deal with this stiff competition in the

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market place, Apple Inc. is continuously working towards developing new and innovative
products for the customers to maximize and strengthen their market share position.
Bargaining Power of the customers or buyers- The bargaining power of the customers is
extreme in influencing the business of Apple. This force in the five force model helps in
determining the way customers’ buying decisions and the related perceptions and preferences
that are likely to impact the business. In the case of Apple Inc. customers do have a reliable
power based on three external factors and they are- a) Low cost of switching (stable), b)
small size of the individual buyers (weak), and c) high buyer information (strong). It is to
note that the factor or element of the low cost of switching is the critical force for the
company to take into consideration. As mentioned above, it is easy for the buyers to switch to
the other providers and sellers present within the technology industry (Markusen 2017). This
is making them powerful in compelling firms like Apple Inc. for ensuring customer
satisfaction. With the same, it is also to mention that the purchase of every buyer is relatively
small as compared to the total revenues of the company. This condition again makes the
buyers weak at their individual level. Notwithstanding this fact, the accessibility and
availability of detailed comparative information regarding the competitive product features
are likely to empower the customers to shift from one brand to another. This force again
enables the customers to exert a significant effect on Apple Inc. and the other key players in
the industry. This again shows that the firm should include the bargaining power of the
buyers as one of its key strategic variables in the business process.
Bargaining Power of the suppliers- It is to note that Apple Inc. experiences a weak force
of braining power from its suppliers. This is that force of the five forces that demonstrates the
influence or the power that the suppliers hold in imposing their demands on a business or
company and its rivalries in the market. In the case of Apple Inc., the bargaining power of the
suppliers is weak. The supplier's control are based on the external factors like- a) moderate to

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the high number of suppliers (weak), b) moderate to high overall supply (weak) and high
ratio of the company concentration to the concentration of the supplier (weak). It is to note
that the global size of the supply chain of Apple Inc. has helped it in gaining access to many
suppliers around the world. In context to Porter's five forces analysis, the high number of
suppliers of Apple Inc. is an external element that demonstrates weak to moderate force
against the firm. With the same, the moderate to a high level of the supply of the inputs like
semiconductors makes the individual suppliers of Apple weak impose their needs and
demands on the company such as Apple Inc. The individual bargaining power of the
suppliers is a weak force for Apple as of the fact that the loss of any single customer provides
a negligible amount of revenue for the company. Furthermore, it is also to note that the ratio
of the firm’s concentration to the concentration of the suppliers also limits the power of the
suppliers and their influence upon the technology industry. Moreover, it is to mention that the
external factor also showcase the presence of a small amount of prominent firms such as
Microsoft, Google, Apple, and Samsung, in comparison to a large number of medium sized
companies and the big suppliers. This is why, it can be said that the bargaining power of the
suppliers in case of Apple Inc. is a minor and negligible issue to consider while developing
strategies for its supply chain management, innovation, industry leadership, and value chain
effectiveness.
The threat of new entrants- In terms of the risk of new entrants, it can be said that Apple
Inc. experiences moderate force from that of the new entrants in the market. It is to note that
this force depicts the impact and the likelihood of the new competitors to enter the market. In
case of Apple Inc., the new entrants can be said to be a moderate force as it exerts reasonable
force based on factors like a) high capital requirements (weak), b) capability of the potential
new entrants (moderate) and c) high brand development cost (weak)

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It is to mention that developing a business for competing against companies like Apple
Inc., needs very high capital. With the same, it is also highly costly to establish such a sharp
brand image for competing against such large firms. These are the factors that make the new
entrants in the market weak. Notwithstanding this fact, there are also many large firms that
have the financial capacity of getting entered into the market. One of the best example to
consider in this regard is that of Google that has already done so by means of introducing
products such as Nexus Smartphones. Also, Samsung also once used to be a new entrant.
Examples like such show that there are many large companies that have the capacity of
competing against Apple Inc. Hence, it can be said that the overall threat of new entrants for
Apple Inc. within the technology industry is moderate and Apple needs to maintain its
competitive advantage over its competitors by means of innovation and more aggressive
marketing in order to sustain its position and remain stronger against the moderate
competitive force of the new entrants.
The threat of substitutes- The risk of the replacements in the technology industry is
also comparatively weak in affecting the consumer electronics, online services, and
computing technology businesses. It is one of the five components of five forces that
demonstrates the strength and power of the substitute products and services in the market in
attracting the buyers. It is to note that the substitute products within the five force analysis
tool are not only the products that have the potential of directly competing with the outcomes
of the company but instead, have substitutes for them. In case of Apple, it is to note that the
alternatives exert relatively weak force on the basis of the external factors like- a) moderate
to high accessibility and availability of the replacements (moderate), b) low substitute
performance (weak) and c) low propensity of the buyers to the substitutes (weak).
There are some substitutes of the products offered by Apple Inc., and they are readily
available in the market (Khan, Alam and Alam 2015). One of the examples to consider in this

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context is that of instead of using iPhones, the majority of the customers today are more
inclined towards using digital cameras in order to take pictures. Also, still, many people
today make use of landline phones for making calls. This force is weak for Apple Inc.
because of the fact that no matter how potential is the substitute for Apple actually are, they
still have restricted capabilities as compared to the products manufactured by Apple Inc. For
example, iPhones have far more potential and capability of doing many things more than just
making phone calls. Such substitutes of Apple's products have very low performance as they
have a limited amount of features in them. Customers make use of products of Apple due to
the advanced technological functions they have on them, and convenience. Such conditions
make the substitution a weak force for influencing the business of the company. With the
same, the customers within the industry also have a low propensity for the substitute products
of Apple. Customers today would rather go for using smartphones that face the hassle of
buying and handling a digital camera or any other devices. Hence, it can be stated that as per
five forces analysis, the company does not require to make this force it’s priority (the threat
of substitute), particularly in the process of making management decisions in the business
processes such as market positioning, product development, and designing and marketing.
3. Strategic Conclusions
The five forces framework when applied on Apple Inc. has shed light in what the
company does for ensuring the industry leadership despite the negative impact of the external
factors in such a competitive landscape of computer hardware and software, consumer
electronics and the online digital distribution networks like the firms Sony, Amazon, Google,
Microsoft, etc. Being established in the year 1976, the company has successfully become one
of the dominant players in the technology industry under Steve Jobs. On the basis of the Five
Forces Analysis, it is suggested that Apple should address the issue of competition and the
threat from the bargaining power of the buyers that seem to be the most notable external