To get valuable industry insights, different analysis models are usually employed by market analysts. One of such analysis models is Porter's Five Forces model. Let's take a look at what Porter's Five Forces analysis is through an example of the company, Apple.
What are Porter's five forces?
Porter's Five Forces is an analysis model used to evaluate an organization's position and competitive standing by analyzing five 'forces' in the industry. Porter's five forces analysis is centered on the idea that there are five essential factors that determine the competitive environment of an industry.
| Porter's Five Forces: |
| 1. Industry Competition (rivalry) |
| 2. Supplier Bargaining Power |
| 3. Buyer Bargaining Power |
| 4. Threat of Substitutes |
| 5. Threat of New Entrants |
An Apple Inc. Porter's Five Forces analysis example is given below, where these five forces will be examined and explained.
Porter's five forces analysis Apple
Since its founding in 1976, Apple has enjoyed a lot of success in the technology marketplace as an industry leader and is currently regarded as one of the world's most valuable companies. In 2018, Apple became the first US company to reach a market capitalization in the excess of one trillion dollars, an achievement the organization was able to reach due to their constant drive towards innovation, marketing strategies and growing brand loyalty. A Porter's Five Forces analysis can give valuable insight into how Apple remains an industry leader in the technology space despite the fierce competition from the likes of Google, Amazon, Microsoft, Lenovo, Samsung, etc.
Industry competition
Organizations such as Samsung, Google Inc., Amazon Inc., among others, provide high competition for Apple in the technology industry. These companies are just as aggressive as Apple when it comes to innovation, development of new products and marketing, thus, providing Apple with a strong industry competitive force.
Additionally, with regard to product differentiation, Apple's competitors offer similar types of products that fulfil the same purpose for customers.
Another major promoter of competition in the technology industry is the low switching costs between products. It takes little investment from the customer to switch from an Apple product to another brand's product, usually due to the presence of similar products carrying out the same purposes. For example, an Android users' favorite application will most likely also be available for iOS (Apple). Another example of this is the iCloud present in Apple iPhone and Google Drive present in Android devices, both products carry out the same purpose, storing data in the cloud.
The presence of these industry competitors provides an important consideration during Apple's strategic planning, a threat that Apple has continually dealt with by making their product unique with an aim to improve and hold their market position.
As a result, rivalry within the industry is high, making this a strong force for Apple.
Supplier bargaining power
This force of the Porter's Five Forces model highlights the influence suppliers hold in imposing their demands on an organization, which is relatively low in the case of Apple. This is due to the diverse number of component suppliers available to Apple globally, thus weakening individual suppliers' position in imposing demands on Apple. Apple can also easily switch between component suppliers at a low cost with little or no obstacle.
Component parts suppliers are also unwilling to lose a big customer like Apple to rival parts-supplying companies, thus strengthening Apple's position when negotiating a contract with a supplier. This shows the low strength of components part supplier bargaining power and the weak position they hold in regards to Apple's strategic planning. As a result, the bargaining power of suppliers is low, meaning it is a weak force for Apple.
Buyer bargaining power
This force of Porter's Five Forces shows the effect of customer preference and buying behaviors on a business.
This is particularly a key force for Apple when we consider the low-cost switching between brands. This force is low when we consider only individual bargaining power, but high when we consider customers' collective bargaining power.
This is due to the negligible revenue loss for Apple when an individual customer switches to a rival brand, however, a mass switch of customers to a direct rival reduces Apple's market share and improves that of the competitor. This is a strong force due to the availability of information to buyers. Nowadays, customers can easily access information about a variety of products' features, customer reviews, etc. This is particularly countered by Apple through constant investment in research and development, which has led to development of various products unique only to Apple, such as Airpods and the Apple watch, thus strengthening customer loyalty and attracting new customers.
As a result, due to the available information and low switching costs, buyer power is a strong force for Apple.
Threat of substitution
According to Porter's Five Forces analysis, the threat of substitution refers to products that are not direct competitors but can act as substitutes to Apple products.
The threat of substitutes for Apple products is particularly low due to the limited capabilities of said substitutes. An example of this is owning a DSLR camera instead of an iPhone 12, but iPhone 12 does more than take clear pictures, giving it the edge over a DSLR camera. At the moment, there is no other technology available that could substitute the use of smartphones completely.
Also, the Apple operating system (OS) places Apple products in a strong market position, due to the fact that there is no near substitute for it. As a result, the threat of substitution is a weak force for Apple.
Threat of new entrants
Due to the already established nature of the Apple brand, its enormous market share and the high capital it will require to establish an organization to compete with Apple, new entrants will face a lot of competition and challenges upon establishment. However, large organizations such as Google and Amazon, with large financial and investment power, can compete directly with Apple even as a new entry, thus bringing the threat of potential new entry to a moderate one for Apple.
Though it is essential for Apple to continually invest in the research and development of new products and build its customer base to keep it competitive edge over other brands and potential new brands.
As a result, the threat of new entrants is a moderate force for Apple due to the high costs of developing and setting up a new competitor brand, even though certain large companies have the capability of doing so.
Conclusion
A Porter's Five Forces analysis of Apple suggests that industry rivalry and customer bargaining power are the two industry forces that can have the strongest effect on Apple's position in the technology market. The threat of substitute products and supplier's bargaining power poses little threat to Apple's market position.
Despite this, it is essential for Apple to continually invest in the research and development of new products and build its customer base to keep its competitive edge over other brands and new brands.
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