Apple’s includes competitors like samsung and the economic climate in different parts of the world.

Apple Inc. (NASDAQ: AAPL) is one of the world’s most visible and recognizable consumer electronics brands. Apple has long been an investor favorite because of its strong revenue growth and high return on investment.

Even though it started as a traditional computer company, Apple now designs and manufactures a wide variety of electronic devices, including smartphones, tablets, music players and television sets. Apple has a very unique business model in which it writes and designs proprietary software and offers its own operating system for all of its devices.

In recent years, Apple has branched out into entertainment and information services. It is now one of the world’s largest online retailers of music, streaming video and software solutions, including smartphone applications.

Despite its uniqueness, Apple’s business model has been very successful. It reported revenues of $224.34 billion on June 30, 2015. Apple also reported sales of $50.77 billion for the second quarter of 2015 and estimated sales of $233.02 billion for the current fiscal year. It was also able to achieve a profit margin of 21.52% for the second quarter of 2015.[1]

Potential Impact of Political Factors on Apple

  • Apple is one of a number of American technology companies that has accumulated a large amount of cash. It had $34.7 billion in the bank on June 30, 2015. This is generating calls for higher corporate taxation in the United States, where income inequality has become a major political issue.
  • Apple is heavily dependent on lower cost manufacturing in China. Social and political unrest in China could disrupt manufacturing or increase manufacturing costs in that country. There have been also been calls to restrict Chinese imports in the United States in an effort to boost American manufacturing.
  • The cost of finding alternatives to Chinese manufacturing could be high for Apple. This could lead to increased prices for Apple products.
  • Apple’s dependence on Chinese manufacturing and markets makes it vulnerable to political unrest in that country.
  • Apple could become the target of growing nationalism and anti-Americanism in China, which could reduce its market share.
  • Apple’s close association with China could become a political issue in countries like the United States and Japan if China were to be perceived as a threat.
  • Apple’s dominant position in fields like music could lead to antitrust concerns and political pressure to break the company up or limit its market share.

Potential Impact of Economic Factors on Apple

  • Increased labor costs in China could take away the cost advantage of some Apple products.
  • Stagnating middle-class incomes in some developed countries, including the United States, could shrink the potential market for higher-end consumer goods such as those marketed by Apple.
  • A strong U.S. dollar could increase exchange rates, making it more expensive for Apple to do business in key markets like Europe and China.

Potential Impact of Social Factors on Apple

  • The biggest growth in consumer spending in coming decades will be in areas of the world such as Africa where people are unfamiliar with Apple products.
  • Consumers in those markets and younger people in Apple’s established markets, such as the United States, lack the strong emotional attachment to Apple products that drive sales.
  • There is a backlash against expensive and stylish products among some customers in the United States and Europe.
  • Ethical concerns about Apple’s manufacturing in China could limit its products’ appeal among socially-conscious consumers.
  • Apple’s close association with China could offend some potential customers in other regions, such as North America and Europe, particularly if tensions with China rise.

Potential Impact of Technological Factors on Apple

  • Competitors such as Google and Samsung have demonstrated a strong ability to duplicate Apple’s products and services. It took less than a year for Google to roll out a payment app; Android Pay, with the same capabilities as Apple Pay. This means that many of Apple’s signature services and products are no longer unique.
  • The number of new consumer products Apple can bring out is limited. Many of its new offerings, such as Apple TV, will have a limited market.
  • Growing use of smartphones and tablets will lower demand for Apple’s popular personal computers.
  • Apple’s proprietary operating system can limit the variety of applications available to smartphone users.
  • The growing capabilities of cyber criminals make Apple’s systems less secure and take away one of its strongest competitive advantages: its reputation for high levels of security and safety.

Potential Impact of Legal Factors on Apple

  • Apple has recently entered the highly regulated financial services sector via Apple Pay. This could increase the level of regulation and government oversight it faces.[2]
  • By offering financial services, Apple could face increased levels of litigation.
  • News reports indicate that Apple is planning to enter another highly-regulated sector: automobile manufacturing.[3] Entering the auto business could increase regulatory, insurance and litigation costs at Apple.
  • Apple depends on a variety of products covered by intellectual property laws, such as software and music, for much of its income. This leaves the company highly vulnerable to both piracy and litigation.

Potential Impact of Environmental Factors on Apple

  • The biggest environmental issue facing Apple is the disposal of used or nonworking electronic devices. The expense of disposing of devices, particularly those containing lithium batteries, could be high. Apple could be forced to assume that expense because of concerns about such devices in landfills.
  • Pollution and other environmental side effects from manufacturing facilities in China are a growing concern. This could lead to increased regulation and higher manufacturing costs at some point in the future.
  • China’s efforts to cut greenhouse gases and limit fossil fuel use could increase electricity rates and manufacturing costs for Apple in that country.
  • Climate change created by global warming could disrupt transoceanic shipping and Apple’s supply chain.
  • Concern about energy use and other side effects from data centers could lead to increased regulation and costs.
  • Apple is highly vulnerable to increases in electricity costs because of its dependence on data centers and other Internet infrastructure.

Apple should be able to thrive in spite of these challenges because it has demonstrated an impressive ability to adapt to a changing environment. In particular, Apple’s research and design capabilities give it an advantage that should propel its revenue growth for decades to come.

[1] https://ycharts.com/companies/AAPL/key_stats

[2] http://www.csmonitor.com/Technology/2015/0923/Why-Apple-Pay-and-other-mobile-wallet-services-could-be-regulated-like-banks

[3] http://money.cnn.com/2015/09/30/technology/apple-car-clues/

Image “Apple Store Bahnhofstrasse Zürich” by Niels Epting is licensed under CC BY-ND 2.0

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.

  • 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.

Michael Porter developed the Five Forces method of analysis in 1979. 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.

The other four forces considered in Porter's 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.

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

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. In 2018, Apple achieved the notable distinction of being the first U.S. company to ever attain a market capitalization greater than $1 trillion.

Apple's success is attributed largely to its ability to innovate and bring unique products to market that have engendered substantial brand loyalty. 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.

A Five Forces analysis of Apple's position in the technology sector shows industry competition 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.

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.

The level of competition among the major companies that compete directly with Apple in the technology sector is high. Apple is in direct competition with companies such as Google, Inc., the Hewlett-Packard Company, Samsung Electronics Co., Ltd., and Amazon, Inc. 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.

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 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.

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.

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.

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.