External Analysis of Apple’s U.S. Laptop Industry
Hi Everyone,
I recently purchased my first MacBook (Apple laptop). This inspired me to do an analysis of Apple’s laptop industry in the U.S. for my strategy class. I ran into some rather interesting conclusions so I figured I would share. This post is not written in my typical blog style, it is more formal than that. Just a FYI 🙂 For a more concise read, I would suggest just reading through Exhibit 1 and Exhibit 2.
Please comment with your thoughts/reactions!
-Troy
The Analysis
Apple Incorporated first moved into the laptop computer market in 1989 (Fitzgerald/Huffington Post, 2012). The Macintosh Portable came out six years after the first laptop, made by Epson (Epson, 2014). It was the start of a line of laptops computers that would evolve into PowerBooks and now MacBooks. Apple’s MacBooks have become today’s best laptop (PC Magazine, 2014 & Charlton/IB Times, 2013). Yet the technology market today is constantly changing along with the industry forces. This analysis looks at Apple’s Macbook industry in the United States and the current environment in which it operates.
The current political, economic, sociocultural, technological, environmental, legal, and international environments are broken down in Exhibit 1 via a PESTELI analysis. The main findings of this analysis are that America’s relationship with China has a strong impact on Apple, the laptop market has matured and is declining, MacBook customers tend to be either relatively young or old, technological innovations are in MacBooks, but are not as well known as in other Apple products, Apple’s intentions are to go green, but their actions may not show it, Apple MacBook suppliers are involved in legal issues more than Apple is for its MacBook, and lastly the cost to manufacture in China could soon be the same as in America. All of these insights help to understand the current framework of the industry.
The critical players in the industry for suppliers are Foxxconn who manufactures final products, Quanta Computer who also manufacturers final products, Intel who manufactures processors, Samsung who manufacturers memory chips, Catcher Technology who makes the aluminum casings, and LG who makes the retina displays (Naidu-Ghenlani/CNBC, 2012). For buyers there are individuals, educational institutions, businesses, and government. They represent the different primary groups to which Apple MacBooks are sold. In terms of substitute products, the main products are smartphones, tablets, desktop computers, and pen and paper. Laptops are used to accomplish tasks. Prior to laptops, pen and paper were used, but more recently users have switched to desktops and laptops as their main means of productivity. Along that line of evolution, the industry has begun to see the laptop market decrease as users begin switching to smartphones and tablets. These critical players are described in more detail in Exhibit 2.
In order to better understand the industry, the bargaining power of suppliers, the bargaining power of buyers, the threat of new entrants, the threat of substitutions, and rivalry within the industry was studied in accordance with Dr. Porter’s Five-Forces (Exhibit 2). The main factors affecting the bargaining power of suppliers are supplier concentration, supplier uniqueness, and supplier inability to forwardly integrate. These factors combine to form a medium-high force of supplier power on the Apple’s American laptop industry.
When looking at the bargaining power of buyers, the main factors are Apple’s brand, buyer lack of concentration, and the laptop industry maturity causing declining sales. These factors combine to form a medium-low force of buyer power. In terms of the threat of new entrants, the main factors that come in to play are Apple’s strong differentiation strategy, large capital investment requirements, difficulties entering distribution channels, and poor industry performance. These factors combine to form a low force for threat of new entry.
The threat of substitution has many factors affecting the force. The main factors are the simple requirements of users, the high cost of MacBooks, and the switching costs for different users. These factors combine to form a medium-high threat of substitution. The last force, rivalry, has low concentration, negative industry growth, customer switching costs, rate of technology change, Apple’s differentiation strategy, and intense public interaction as factors affecting the rivalry in the industry. These factors form a high threat of rivalry in the industry.
Based on the Five-Forces Analysis, the industry is seeing an overall medium-high level of industry force. The main factors that are pushing these forces higher are the mature industry seeing decreased total sales, low industry concentration, high supplier concentration, and the availability of substitutes. The main factors lowering the force are Apple’s branding/differentiation strategy and low buyer concentration. After looking through all of the forces, there is a very large importance placed in basically every force on Apple’s brand and the benefits of that brand.
Unfortunately, the overall medium-high force from all five forces significantly impacts the industry’s profitability. A medium-high supplier power forces Apple to pay more for the latest Intel chips and Samsung memory. The medium-low power of buyers helps Apple because they are able to differentiate and charge more, but for companies like Asus, Acer, and Lenovo, who have less brand value, there is significantly more power for the buyers to drive the price down. The low threat of new entrants is really the only category where any company in the industry would be, at face value, happy, because a low threat of entrants means less competition for them, but the major issue here is that a substantial reasoning for this low level is because the market is declining and no one would want to play in the industry. The medium-high threat of substitution is a force that is slowly growing more and more concerning, because of simple functionality users who don’t need a fully functional laptop. This drives prices down for everyone in the industry, because the people will buy fewer products, forcing companies to drop prices to fill capacity in the short term. Lastly, the high rivalry within the industry forces each company to constantly compete on quality and price. While this is good for the consumer, it only hurts the bottom line of each company within the industry. The detailed Five-Forces Analysis is shown in Exhibit 2.
Complementary products do exist for Apple’s MacBook. The iPhone, iPad, and iPod are all examples of products that Apple makes that are complimentary. The reason is the Apple ecosystem. All products can be connected through the iCloud and all of your content can be synced together (Apple, 2014). This pushes customers who own one product to purchase more so they can live in a synced Apple world. Additionally, software, expensive camera equipment, and expensive music equipment are complementary products. Apple has been known for being superior in regards to photo editing and music creation, but this has also placed the developers for top notch software in these fields to also be developing mainly for Mac (Kelly/CNN, 2013). The key result of this is that professionals in these fields are pressured to purchase MacBooks because of the software availability. An extension of this is how novice photographers and music creators are pressured to purchase Mac because the professionals use them. These complementary products lead to increased MacBook sales.
Summary
Currently the MacBook line is in an acceptable position. The market share of MacBooks is 3rd in the U.S. (Exhibit 3), but the America laptop industry is decaying. Going forward, Apple must work closely with legislators to ensure that key trade issues regarding China are accepted. Any steps to decrease China’s ability to manufacture Apple products could be disastrous. Additionally, MacBook users enjoy their products because they are easy to use, they are trendy, and, for some, they serve a very specific niche. Moving forward, Apple must place high importance on understanding their customers, both young and old, to ensure they keep meeting their expectations. Thirdly, some of Apples actions related to their design have gone against their image to go green. Corrections for the future must be taken to act on their dedication to the environment. Additionally, the laptop industry has matured and is declining. This along with the MacBooks relative lack of differentiation is a concern. Apple should investigate new ways to differentiate their MacBook. Lastly, Apple should be looking into moving manufacturing back to the U.S. If it is true that manufacturing products in China will get just as expensive as they are in the U.S. by 2015 (LaBeau/CNBC, 2013), then Apple must be taking actions to see if it makes more financial sense to produce certain products in the U.S. and decrease supply chain costs. In terms of the current industry forces, Apple will need to make sure to continue to fortify their brand, as it is a key factor in many of the industry forces. They will also need to constantly be working to understand where the MacBook fits into their customer’s needs. The smartphone and tablet may cannibalize more of the laptop market so Apple needs to be ahead of that adjustment to change aspects of the business like sales forecasting, resource allocation, and research and development expenditures. Lastly, Apple will need to be constantly watching the America laptop market to make sure playing in the market is the correct decision.
In conclusion, the MacBook line is an acceptable position. The industry is very dynamic and has growing concerns. With these concerns there will be needed action to adjust the corporate strategy. With the PESTELI Analysis and Dr. Porter’s Five-Forces, Apple can get a better understanding of the MacBook industry environment and the forces being applied.
Exhibit 1: PESTELI Analysis
| Political | The laptop market in the United States has matured based on the industry sales decreasing (Census Bureau, 2007). Therefore, the political implications on the industry are minimal. Most of the initial issues that needed governmental control have already been decided. The only recent political issue involves the NSA and spying on Americans through their computer (Gorman/WSJ, 2013). It has even been mentioned that the NSA is intercepting laptops after they get purchased in order to install spying software (Kain/Forbes, 2013). Another issue related to politics is the United States’ relationship with China. Currently, all of Apple’s MacBooks are manufactured in China so a trade issue in the future could cause significant issues. |
| Economic | The current macroeconomic environment in the United States is on the rise after the issues of 2008-09. Referencing Exhibit 4, the percent change in the domestic product for durable goods was about -5% in 2008 and 2009, but has rebounded to 6-7% since. Additionally, The NACIS market for laptop computers (334111) decreased 7.86% from 2002 to 2007 (Census Bureau, 2007). This decrease in a serious concern. Based on Exhibit 3, Apple has 11.6% of the market share for PCs as of Q3 of 2013. This is down 1.4% from Q3 of 2012. |
| Sociocultural | There was a study done that showed the average Mac user was under 20 years old and female (Shontell/Business Insider, 2012). It should be noted that this study was conducted by asking 1.1 million Facebook users to answer a survey. So while not acceptably scientific, it does provide some insight into the average demographic of a mac user. It was also interesting to see that 95% of the respondents said their next purchase would be a Mac. In general, it appears that the younger generation is in favor of Macs, but there is also an older generation that is moving towards Mac because issues they have with Windows and are not having with Mac (e.g. easier to use, less viruses) (Magid/Forbes, 2013). This requires that Apple be conscious of young customer requirements (e.g environmentalism, brand, etc…), but also older customer trends (e.g. functionality, simplicity, etc…) |
| Technological | Apple is seen by many to be a technological innovator. For their revolutionary iPod, iPhone, and iPad, their innovativeness is well known. For the MacBook, Apple’s laptop, a lot of the innovations have come through design. The basic components of a computer have been known for a while, but the MacBook creates a unique experience through the thin unibody aluminum case, the battery life, the processor power, the HD display, and the benefits of a software operating system designed to specifically work with the hardware (Business Insider, 2013). As a result, the MacBook is not seen as technologically innovative as some other Apple products, but is still slightly differentiated based on other innovations. The fact that MacBook is not significantly differentiated is demonstrated in the price similarity to other products with similar specifications (Nguyen/Toms Hardware, 2008). |
| Environmental/Energy | In July of 2012, Apple asked the Electronic Product Environmental Assessment Tool (EPEAT) to remove all of its products from its green registry, because “They said their design direction was no longer consistent with the EPEAT requirements” (Petronzio/Mashable, 2012). These actions seem to go against their desire to be environmentally friendly. According to their website, Apple “designs products to be as environmentally responsible and as energy efficient as possible.” They even go into detail regarding their total carbon footprint for facilities and products since 2009. Apple is known for using products like Intel chips, which substantially reduce energy usage (Tibken/WSJ, 2012). |
| Legal | There has not been a significant amount of litigation for Apple in its MacBook realm. In 2011, Apple lost a case regarding their charging adapters malfunctioning.Foxconn, one of Apples main manufacturers recently got into labor issues. In October of 2013, Foxconn admitted to student interns working unlawful overtime in the factory (BBC News, 2013). In January of 2012, auditors found at least 50 breaches of Chinese regulations and Apple code of conduct (James/Bloomberg, 2012). These legal issues of suppliers can seriously impact Apple’s brand, similar to Nike.Apple has 8,500 US patents in total (McGrath/EE Times, 2012). By virtue of having this many patents, Apple spends a significant amount of resources obtaining patents and enforcing them. |
| International | Recent studies have found the cost of manufacturing in China, where all MacBooks are producted, is increasing. They estimate by 2015 the costs to be the same as in the U.S. Additionally, there have been large multinationals growing out of China (e.g. Lenovo) that are changing the industry for Apple. (Labeau/CNBC, 2013) |
Exhibit 2: Porter’s Five-Forces Analysis
|
Force |
Intensity |
Examples |
| Suppliers |
Medium-High |
Examples: Foxxconn (Manufacturing), Quanta Computer (Manufacturing), Intel (Processors), Samsung (Memory Chips), Catcher Technology (Aluminum Casings), and LG (Retina Displays) (Naidu-Ghenlani/CNBC, 2012). Decision Reasoning: 1) Apple has relatively high concentration with their suppliers. In fact, their top 200 suppliers account for 97% of their supplies (Apple, 2014). This increases supplier power, because Apple must rely more heavily on their current suppliers to meet their needs. 2) Some of Apple’s suppliers have products that Apple must purchase from them. An example is with their Retina displays made by LG. These displays are a large part of the MacBook and the product’s value would be significantly less without them. This gives LG more leverage against Apple and increases the supplier power 3) Most of Apple’s suppliers, with the large exception of Samsung, would never be able to forwardly integrate to become a laptop manufacturer. This decreases the supplier’s power. |
| Buyers/Customers |
Medium-Low |
Examples: Individuals, educational institutions, businesses, and government. Decision Reasoning: 1) Apple has recently become the world’s best brand (Gross/CNN, 2013). This differentiation weakens the buyer’s ability to negotiate on price and therefore decreases their power. 2) There are many buyers from many different sectors. This lack of concentration decreases the buyer’s power 3) The market for laptops has matured and is decreasing; this increases the buyer’s power. |
| Potential Competitors |
Low |
Decision Reasoning: 1) Apple’s excellent ability to differentiate decreases the threat of any new entrant 2) To become a large laptop manufacturer there are significant capital investments that are required. Even if a company were to outsource their manufacturing, they would still have large investments in supply chain growth. This decreases the likelihood of a new entrant. 3) While internet markets like Amazon and Newegg would help make it easier for a new manufacturer to distribute their product, getting access to shelf space at any well-known retailer (e.g. Best Buy) would be near impossible. This decreases the threat of entry 4) The fact that the market has matured and is showing decreasing total sales would hinder the justification of entering this market. |
| Substitutes |
Medium-High |
Examples: Smartphones, tablets, desktop computers, pen and paper Decision Reasoning: 1) While the use of pen and paper as the main tools of productivity has passed, the need to have the functionality of a laptop or desktop computer is still strong. Some individuals are trying to have their tablets replace their laptops for basic web searching and other simple tasks (Reisinger/CNET News, 2012), but many individuals and businesses need the functionality of a full word processor and spreadsheet software, for example. For the customers who need this high functionality, the threat of substitution is driven down, because a smartphone or tablet is not an alternative for their functional needs. Unfortunately the trend toward less functionality is increasing. Google Chromebooks are a perfect example. Chromebooks are internet only laptops that only work when connected to the internet and only provide the same level of functionality as a tablet and smartphone (ABC News, 2013). Additionally, the top 20 websites in the world can easily be accessed via a tablet or smartphone (Alexis, 2014). This all means an increasingly large amount of device users only need simple functionality therefore increasing the threat of substitution, because smartphones and tablets are seen as equal alternative. 2) These substitutes are significantly less expensive than Apple’s MacBooks. Smartphones cost anywhere from $200-600, tablets cost anywhere from $200-1,000, and MacBooks cost anywhere from $1,000-$3,000 (Apple, 2014). If the user feels the performance of all of these to be the same, then the high prices of the MacBook would increase the risk of substitution. 3) The switching costs for a user will vary based on their requirements. A user demanding high functionality will have high switching costs and a user demanding low functionality will have low switching costs. This creates a low threat of substitution and a high threat of substitution, respectively. |
| Rivalry |
High |
Examples: Dell, Lenovo, Google, Samsung, Acer, Sony, and Asus (Huffington Post UK, 2013) Decision Reasoning: 1) Four firm concentration ratio in 2007 was 86.9% up from 75.5% in 2002 (Census Bureau, 2007). HHI is at least 1,900 based off of only four companies holding almost 87% of the market. This shows at least a moderately concentrated industry. This creates medium to high rivalry in the industry, because there are only a few equally matched competitors. 2) The economic data shows a -7.62% decline in shipments from 2002 to 2007. This decline in growth increases rivalry (Census Bureau, 2007). 3) Customer switching costs between Apple and any other competitor are high. This is because Apple uses its own operating system, OSX, while all other manufacturers use Windows. This creates high switching costs for any customer leaving or going to Apple MacBooks as they have to learn or adapt to a new operating system environment. These high switching costs decreases rivalry. 4) Technology changes so fast that there is high obsolescence with laptops. This increases rivalry. 5) Apple sees itself as a differentiator even when its competitors may not. This lowers the rivalry some for Apple, but increases it for most of the competitors in the industry. 6) The industry, in general, is highly published. This increases rivalry as companies fight it out in the headlines too. |
Exhibit 3: PC Market Share in the United States (Hughes, 2013)
Exhibit 4: Domestic Product Percent Change for Durable Goods (Bureau of Economic Analysis, 2013)
|
2005 |
2006 |
2007 |
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
|
5.4 |
4.3 |
4.6 |
-5.1 |
-5.5 |
6.1 |
6.6 |
7.7 |
7.1 |
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