4/15/2021 Analyzing Porter's 5 Forces on Apple (AAPL)

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Analyzing Porter's 5 Forces on Apple (AAPL)

By J.B. MAVERICK | Updated Jun 29, 2019

TABLE OF CONTENTS
The Porter 5 Forces Model Apple in the Marketplace From a 5 Force…
Industry Competition Bargaining Power of Buyers
The Threat of New Entrants to the Marke… Bargaining Power of Suppliers
The Threat of Buyers Opting for Substitu…
EXPAND +

Investors and market analysts often seek different perspectives for market analyses of
companies to gain a better picture of companies' positions and strengths within their particular
industries. One tool for fundamental analysis that goes beyond just examining financial metrics
such as the price-to-book ratio (P/B) is Michael Porter's Five Forces Model.

KEY TAKEAWAYS
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Apple, Inc. has grown to become one of the world's most valuable companies and
respected brands.
Porter's Five Forces Model can be applied to Apple to understand its position within its
industry and how it compares to the competition.
This type of analysis reveals that Apple is still in a strong market position, but faces
several threats to its dominance.

The Porter 5 Forces Model

Michael Porter developed the Five Forces method of analysis in 1979. [1] The Five Forces model
aims to examine five key forces of competition within a given industry. The main force examined
by Porter's model is the level of competition within an industry. A person could even argue that
Porter's model is essentially an analysis of the competitiveness or non-competitiveness of an
industry. Advertisement

The other four forces considered in Porter'sAdvertisement

model all impact the level of competition. They
include the threat of new entrants to the marketplace, the threat of consumers opting for
substitute products, the bargaining power of suppliers within the industry, and the bargaining
power of buyers or consumers within the industry's marketplace.

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Important: Industry competition and the bargaining power of buyers are the most
substantial marketplace factors that impact Apple in terms of profitability.

Apple in the Marketplace From a 5 Forces Perspective

Through its Macintosh computers and operating system, the iPad, iPhone, and other products,
Apple, Inc. (NASDAQ: AAPL) has achieved massive success as a company despite going through
a number of up and down cycles since its founding in 1976. [2] In 2018, Apple achieved the
notable distinction of being the first U.S. company to ever attain a market capitalization greater
than $1 trillion. [3]

Apple's success is attributed largely to its ability to innovate and bring unique products to
market that have engendered substantial brand loyalty. [4] Its product development and
marketing strategies reveal an awareness of the need to deal with the major marketplace forces
that can impact Apple's market share and profitability.

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A Five Forces analysis of Apple's position in the technology sector shows industry competition
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and the bargaining power of buyers as the two strongest marketplace forces that can impact
Apple's profitability. The bargaining power of suppliers, the threat of buyers opting for
substitute products, and the threat of new entrants to the marketplace are all weaker elements
among the key industry forces.

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FAST FACT
Apple's dominance in the industry has been largely unchallenged, but a strong
challenger could come in the future and the company must continue innovating
and building brand loyalty so as to keep any potential competitor at bay.

Industry Competition
The level of competition among the major companies that compete directly with Apple in the
technology sector is high. [5] Apple is in direct competition with companies such as Google, Inc.,
the Hewlett-Packard Company, Samsung Electronics Co., Ltd., and Amazon, Inc. [6] All of these
companies expend significant capital on research and development (R&D) and marketing, just
like Apple. Thus, the competitive force within the industry is strong.

One thing that makes the industry so highly competitive is the relatively low switching cost. It
does not require a substantial investment for a consumer to ditch Apple's iPad for an Amazon
Kindle or other tablet computers. The threat of marketplace competition is a key consideration
for Apple, which it has dealt with primarily through continually developing new and unique
products to increase and strengthen its market share position
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products to increase and strengthen its market share position.

Bargaining Power of Buyers

The element of low switching cost referred to above strengthens the bargaining power of buyers
as a key force for Apple to consider. There are essentially two points of further analysis within
this force: the individual bargaining power of buyers and their collective bargaining power. For
Apple, individual bargaining power is a weak force, since the loss of any one customer
represents a negligible amount of revenue for Apple.

However, the collective marketplace bargaining power of customers, the possibility of mass
customer defections to a competitor is a strong force.

Apple counters this strong force by continuing to make substantial capital expenditures in R&D,
enabling it to keep developing new and unique products such as the Airpods and the Apple
Watch, and by building significant brand loyalty. Apple has been very successful in this area of
competition, establishing a large customer base that, basically, would not consider abandoning
its iPhones in favor of another smartphone competitor.

The Threat of New Entrants to the Marketplace

The threat of a new entrant to the marketplace that could seriously threaten Apple's market
share is relatively low. This is primarily due to two factors: the extremely high cost of
establishing a company within the industry and the additional high cost of establishing brand
name recognition.

Any new entrant to the marketplace of personal computing or smartphones needs to have a
massive amount of capital just to spend on R&D and manufacturing to develop and produce its
own product portfolio prior to ever bringing its products to market and beginning to generate
revenue. Such an entrant faces the already identified strong competition within the industry
that exists between Apple and its major competitors, all of which are large, well-established
firms.

The secondary challenge is establishing brand name recognition within an industry that already
has several companies, such as Apple, Google, and Amazon, with very strong brand recognition.

Although it is possible some new company (perhaps a Chinese firm with financial backing from
the government), might eventually challenge Apple's position within the industry, for the
immediate future, the likelihood of such a challenger arising is remote.
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Nonetheless, it is important for Apple to continue strengthening its competitive position

through new product development and building brand loyalty to place any potential new
entrants to the industry at a larger competitive disadvantage.

Bargaining Power of Suppliers

The bargaining power of suppliers is a relatively weak force in the marketplace for Apple's
products. The bargaining position of suppliers is weakened by the high number of potential
suppliers for Apple and the ample amount of supply. Apple is free to choose from among a large
number of potential suppliers for component parts for its products. The industries of its parts
suppliers, such as the manufacturers of computer processors, are themselves highly
competitive.

The switching cost for Apple to exchange one supplier for another is relatively low and not a
significant obstacle. Plus, Apple is a major customer for most of its parts suppliers, and,
therefore, its suppliers are very reluctant to risk losing the company's business. This
strengthens Apple's position in negotiating with suppliers, while conversely weakening their
positions. The bargaining power of component parts suppliers is not a major consideration for
either Apple or its major competitors.

The Threat of Buyers Opting for Substitute Products

Substitute products, within the framework of Porter's Five Forces Model, are not products that
directly compete with a company's products but possible substitutes for them. In the case of
Apple, an example of a substitute product is a landline telephone that might be a substitute for
owning an iPhone.

This market force is relatively low for Apple due to the fact that most potential substitute
products have limited capabilities compared to Apple's products, as in the example of a
landline telephone compared to an iPhone that has the capability to do much more than just
make telephone calls.

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Related Terms
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 Related Terms
4/15/2021 Analyzing Porter's 5 Forces on Apple (AAPL)

Porter's 5 Forces
Porter's 5 Forces is a model that identifies and analyzes the competitive forces that shape every industry
and helps determine an industry's weaknesses and strengths. more

How SWOT (Strength, Weakness, Opportunity, and Threat) Analysis

Works
SWOT (strengths, weaknesses, opportunities, and threats) analysis is a framework used to evaluate a
company's competitive position and to develop strategic planning. more

Understanding the Six Forces Model

The six forces model is a strategic business tool that helps businesses evaluate the competitiveness and
attractiveness of a market. more

How Substitutes Work

A substitute, or substitute good, is a product or service that a consumer sees as the same or similar to
another product. more

Duopsony Definition
Duopsony, the opposite of duopoly, is an economic condition in which there are only two large buyers for
a specific product or service. more

What Is the Porter Diamond?

The Porter Diamond is a model that attempts to explain the competitive advantage some nations or
groups have due to certain factors available to them. more

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