1. Analyzing Apple's Bargaining Power of Buyers (AAPL)
  2. Analyzing Apple's Bargaining Supplier Power (AAPL)
  3. Analyzing Apple's Degree of Rivalry Among Competitors (AAPL)
  4. Analyzing Apple's Threat of New Entrants (AAPL)
  5. Analyzing Apple's Threat of Substitutes (AAPL)

To understand how a company competes and what factors affect its profitability, it is useful to start by examining the competitive forces affecting its business. Michael E. Porter, a Harvard Business School professor, developed a framework for addressing these issues called Porter’s Five Forces, which includes the bargaining power of a company’s suppliers and customers, a careful look at its current rivals, the threat of a new business coming in and taking the market, and the risk of customers adopting substitutes for the product or service.

A company such as Apple, Inc. (NASDAQ: AAPL) is especially vulnerable to these factors because of the businesses in which it deals. From hardware to software, services to media, Apple is everywhere, and this means it competes on a variety of fronts. Understanding what makes it profitable requires understanding the factors or forces that impact its ability to compete. This is especially true concerning its suppliers.

Supplier Contracts

Apple retains capital assets at many of its suppliers’ facilities and engages in inventory prepayments at negotiated prices. This pattern is convenient and keeps Apple’s processes lean, but there are risks. The company’s purchase commitments can be as long as 150 days, and technology moves quickly. While Apple continually reviews these holdings, with the pace of innovation, some of these inventories, whether finished products or components, can become obsolete. However, Apple needs to have some inventory ready to go, so when it comes to these types of contracts, suppliers have limited power.

Sufficient Quantities

Moreover, for as much as Apple may risk getting stuck with a surplus of obsolete products or components, there is also a risk the supplier will be unable to deliver. Many of the components Apple uses come from very few sources, and industry-wide shortages are not uncommon. Some of Apple’s products feature components that are custom for the company, so suppliers have to accurately forecast the company’s demand. Also, some of these suppliers may have financial difficulties that can limit Apple’s ability to get the volume of parts it needs when it needs them. Suppliers have a high amount of bargaining power in this respect and may negotiate terms for supplying sufficient qualities.

Overseas Suppliers

Many of Apple’s suppliers are overseas, and the company relies on them to ensure the components and products they produce adhere to the standards of quality that Apple and its customers expect. Apple extends warranties to its customers, and in some cases, may have to make good on any quality issues before it can be reimbursed by those suppliers. In a worst-case scenario, such as a batch of defective computers, Apple may have to absorb considerable costs temporarily. Also, Apple has to trust that its suppliers’ shipments are prepared correctly and packaged appropriately for customs and safety in transit. Otherwise, items may be damaged in transit causing Apple to be unable to fulfill orders in a timely fashion.

Third-Party Issues

Apple relies on a variety of third-party digital content, including movies, music and books. The company uses these products to fuel its ecosystem and tie its product portfolio together. Apple has to offer the digital content its customers want, and this means negotiating commercially reasonable terms with its suppliers. Suppliers have an extremely high degree of power in this regard. Also, Apple needs good relationships with third-party software developers. There is no guarantee these developers will create software that can run on Apple systems, and if there is not enough available software that works with Apple devices, customers may stop buying its products. This risk is significant and holds true with both mobile devices and computers.

Analyzing Apple's Degree of Rivalry Among Competitors (AAPL)
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