When you consider the factors that make a company successful, you have to include internal factors and market demand, but of equal importance are the competitive forces facing the company. A Harvard Business School professor named Michael E. Porter developed a system for looking at these elements of competition in 1979, called Porter’s Five Forces. These five forces include the threat of new entrants, the threat of substitutes, the bargaining power of suppliers, the bargaining power of customers and the jockeying for position within the industry.
The framework is strictly qualitative, but it provides a useful checklist for understanding the competitive forces a company has to manage in order to be successful. Porter’s Five Forces is especially good at examining larger corporations, such as Apple, Inc. (NASDAQ: AAPL). Take a look at how Apple’s customers could affect its business strategy.
One way Apple’s customers influence its profitability and, by extension, its business strategy is with what they buy. Apple sells a wide variety of products and services; each requires a different approach. As of December 2015, Apple has been releasing new iPads with roughly the same frequency as new iPhones. However, the two products have different buying patterns. According to TheStreet, tablet shipments are down over 8% for 2015 compared to 2014. The issue is there are not as many marked differences between tablet models as between smartphones, which may draw sales through increased memory, improved camera resolution and size differences.
Consumers may also impact Apple’s business strategy with their preferences. For instance, before an iPad of any size can really work well in business or for people who may have to work on documents on the fly, such as students, a USB port is practically a necessity. As of December 2015, Apple does not offer a tablet with a USB port. There are third-party adapters, some of which are compatible with iPads. Apple's only original equipment manufacturer OEM solution is an adapter that works with digital cameras but not documents. Going forward, customer preferences for USB ports could force Apple to develop a new iPad with that feature.
The cost for buyers to switch between Apple and another provider can be significant, but the issue is not strictly about price. While some Apple products cost as much as $2,000 with certain features, many others are more affordable. For instance, an iPod Shuffle costs less than $50. Also, there is a variety of purchasing plans available, especially for mobile technology such as Apple's iPhones.
The real cost comes from going outside of the Apple ecosystem. Remember that Apple software and media only works with Apple devices. If an Apple user switches to a device made by a different company, the media purchased for the Apple device does not work, nor do any smartphone applications or software designed for Apple. In this sense, Apple’s customers’ bargaining power is low. It would cost so much for users to change operating systems that many would not unless quality became a major issue.
The bargaining power of Apple’s customers is also low because the market is fragmented. The company’s products and services appeal to a wide variety of individuals, and the products and services have a broad range of uses. Apple products can be found in corporate environments and high schools, government offices and home offices. No one demographic or subgroup has more influence than another.
However, collectively, Apple’s customers have some common demands. Issues such as operating stability, hardware quality, and the availability of applications and software programs are aspects that are paramount to Apple’s business. The company is vulnerable to quality problems that can harm its reputation and the availability of different third-party apps and content. Buyer bargaining power in this regard is very high.
Analyzing Apple's Bargaining Supplier Power (AAPL)
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