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)

Understanding the competitive forces within an industry can be as simple as looking at five factors. There is the rivalry within the industry itself, but there is also a collective power a company’s customers and suppliers have that affects how profitable a business becomes. Also, there is the threat consumers will choose a different company, whether it is a new entrant in the industry or a substitute product, is important. This system of analysis is called Porter’s Five Forces after its creator, Harvard Business School professor Michael E. Porter.

The competitive force of new entrants is especially pronounced in the consumer technology industry, where a product is only as good as the next big thing. Being cool is as important as remaining relevant, and trends spread like wildfire. Apple, Inc. (NASDAQ: AAPL), which competes on hardware, software, media and services, can be very vulnerable in this regard.

Cost of Entry

There are considerable barriers to a company wanting to compete with Apple. Any new entrant into the technology sector has to absorb substantial costs in research and product development as well as marketing and distribution. This makes the threat of new entrants very low, but new entrants do not have to equal new companies. There is a marked tendency for vertical integration in Apple’s industry, and it is easier than ever for a would-be competitor to adopt a fabless business model.

Fabless Business Models

In a "fabless" business model, one company handles the development of the new product and the prototyping, and then it outsources the manufacturing of that product and its components to other firms. In this way, a company gets all the benefits of a top-tier manufacturing facility without having to build its own facility or train its own workers. This means a business that wants to challenge Apple on any of its product fronts could develop a great technology, such as a new wearable or hologram computer, tinker with prototypes until it can recreate the innovation at a marketable cost and then outsource all the manufacturing.

Asset Specificity

While not all companies have the assets, whether machinery or people, to produce a product or software that could present a challenge to something in Apple’s product portfolio, companies that are already involved in a related industry are not limited by asset specificity. For instance, Intel could decide to get into making its own mobile devices, or Samsung could develop its own set-top box to challenge Apple TV. In this sense, asset specificity is a barrier to entry for some companies, but not all.

Patents and Proprietary Knowledge

The real issue is the ideas and knowledge necessary to create competing technology. These concepts and ways of doing things can be patented, creating a barrier to entry in the process. The founding company of the innovation could charge the new entrant with patent infringement. Comparable products often fall vulnerable to this issue. Even if the competing technologies are not exactly the same, they could be close enough to warrant a patent infringement charge, or at least delay the debut of a new product.

Economies of Scale

In addition to creating a competing product, a new entrant needs to create enough demand to exploit economies of scale. In manufacturing, the goal is to produce products at the minimum efficient scale (MES), which is the most cost-efficient output level, but it takes some work to get there. Up to that point, creating the product may not be profitable, let alone competitive. This is a significant barrier to entry for smaller companies. Larger, more-established companies may be able to manage those costs until an appropriate level of demand is reached, but it would take a considerable investment in marketing and likely some alliances with other companies to make it work.


Analyzing Apple's Threat of Substitutes (AAPL)
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