Question

Perform an industry analysis of the smart-phone industry. Do you believe Apple was effective in neutralizing the threats and capitalizing on the opportunities posed by the forces in the smart-phone industry? If yes, explain how. If not, explain why not.

Answer 1

Answer-

Competitive rivalry was very high for mobile phones industry, the market was dominated by major brand competitors such as Nokia. Motorola, Samsung, HTC, LG Electronics, Research in Motion (RIM). Competing and gaining economies of scale and market share against major competitors was challenging to new entrants with little experience. In distribution, powerful cellular carriers such as T-Mobile, Vodafone, Verizon Wireless, and AT&T had control over the networks and the phones used on those networks.

After the debut of Android, an open and free platform developed by Google, Apple faced even more intense competition. Seeing the potential that may rival Apple, many mobile phone supplier and manufacturer backed the Android platform. Samsung became Apple’s most direct competitor after the release of Android-based Galaxy S2 handset.

Apple’s App Store also faced its rival from Google - the Play Store. As an open and free platform, Android apps met fewer restrictions and received the attention from app developers comparable to iPhone apps.

The smartphone intense competition even reached the court regarding lawsuit on design and intellectual property. In this business, every competitors faced lawsuit and pursued sue. Apple was the most aggressive in pursuing legal compensation and redress against Android platform and Android devices.

Power of Buyer

The bargaining power of buyers could be described as medium. The iPhone was considered a luxury, high-end device that differentiated itself from other mobile phones by its user interface which was the industry-first multi-touch screen. Apple’s agreement with AT&T on an unprecedented revenue-sharing on the first iPhone generation resulted in huge loss of service-share revenue because customers found a way to buy iPhones from unauthorized resellers and used them on unapproved mobile network.

During the release of later iPhone model, Apple revamped its pricing model and gain more power as a negotiator when the company added more carriers. Additionally, by lowering the price of prior iPhone model, plus the big subsidies and larger distribution channel, buyers were exposed and more willing to pay for the easy-to-use iPhone.

As the revolutionary “Invention of the year”, Apple gained powerful brand recognition for the iPhone which contributed to the appeal of the device. Furthermore, App Store, the key driver behind the iPhone sensation, was introduced as part of iTunes and became a attractive business for Apple thanks to its user friendly interface that easily reach consumers and software developers.

Power of Supplier

Apple was able to gain significant cost advantage by falling component costs and design improvements. Thanks to this, the later iPhone model with twice as much storage capacity cost less than the first iPhone generation. By becoming one of the largest customers of Foxconn in China, the supplier power was weaken as Apple strived to keep its cost down.

Threat of New Entrant

The threat of new entrants into the smartphone market is relatively low with the exception of companies that already operate in the electronics industry, such as Samsung. When Android and Google Play Store made their first appearance, Apple faced intense competition from handset manufactures and their Android-based devices. However, for companies interested in competing as new entities, the cost of capital is extremely prohibitive as large amounts of capital would be required to establish research, development and production facilities.

Threat of Substitute

The threat of substitutes could be considered low as companies have established high barriers of entry. Since mobile devices included a multitude of services and technology products such as digital camera in a single device, consumers were discouraged from switching to alternative products.

Overall, the five forces in the smartphone industry were relatively high. However, Apple was able to effectively neutralize the threats and take advantage of opportunities to sustain its competitive edges.

Using its powerful brand recognition, Apple made its way through the intense competition among major companies. Right from the first debut of the iPhone, this device was recognized as a revolutionary product that “reinvent the phone”, receiving immediate attentions from all stakeholders. To ensure the success of the iPhone, Steve Jobs even made preparation to protect the company’s intellectual property since the earliest days at Apple, and he relentlessly pursuit legal proceedings to destroy Android. The patent wars have raised the barrier to entry for new entrants and substitutes even higher.

After the loss of service-share revenue when consumers found a way to buys iPhones from “grey market”, Apple immediately changed its relationship with carriers from single to multiple carriers selling iPhones. As a result, the iPhones received big subsidies, expanded distribution that cause revenue and unit volumes to explode.

Apple positioned itself as a powerful buyer by becoming one of the largest customers of Foxconn. Hence, Apple gained substantial cost advantage while keeping the iPhones at premium price, which consumers were willing to buy even without subsidies. As a result, Apple vied with Samsung for the largest market share in smartphones, and generated over 50% of mobile phone industry’s profit with less than 4% unit market share.