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How to use Porter's five forces example Apple

Porter’s Value Chain is used to identify a company’s competitive advantages, it shows every stage involved in making a product...

By, Gavin Whale | Date: 10/06/2017 | Updated: 02/07/17

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Fun Fact:

Harvard Business School's Micheal Porter invented the concept of the five forces. The five forces first appeared in the 1980 book "Competitive Strategy: Techniques for Analysing Industries and Competitors.

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Porter’s five forces are used to assess competitive forces in the macro environment; the stronger the five forces identified are the less a company can raise prices and therefore receive higher profits. The five forces are shown in figure A below,

Figure A: Porter’s Five Forces

porters five forces

These forces are continuously changing just like the macro environment is continuously changing (Porter, 2010).

The first of Porter’s five forces is threat of new competitors entering the market, there are a few ways a company can reduce this risk. The first one is by having economies of scale something Apple has, this helps as it means companies with economies of scale have lower costs per unit as they sell or produce more so this means any potential new entrants would have to compete with Apple’s products which would be more profitable or lower in cost.

Another way to combat the threat of entrants is to have brand loyalty (Hill & Jones, 2009). Apple have a very strong brand, some could argue it has weakened since Steve Job’s death however it does remain strong and is even said to provoke religious brain activity within some individuals.

Having brand loyalty will reduce the threat of entrants as they would have to compete against these brands which would mean any entrant would have to invest a lot of money or launch a product under an existing brand in a new market, however brand image has to fit the market. For example, Apple’s brand is known for innovation which fits with its technological market, if say Coca-Cola wanted to enter the same markets as Apple it would have to invest a lot of money in changing people’s perceptions of Coca-Cola to trust the company with technology so using the Coca-Cola brand would not be fitting for the market (Apple, 2013) (Coca-Cola, 2010).

Another thing Apple do to reduce the threat of entrants is using absolute cost advantages which can be gained through having the best production operations by in Apple’s case taking out patents and keeping secrets, this is an especially effective way of keeping entrants out of the technology market as all new technologies and processes can be patented meaning no one else can legally use or make them. This means no other company can have the same products and features as Apple because of all the patents it has, in fact Apple recently patented a curved phone battery which may appear in its next line of products this means no other company can produce a phone the same type of curved phone battery (Hill & Jones, 2009) (Apple, 2013).

Threat of substitutes is the threat of a product that does the same or is the same as a business’s product that is already on the market, in the case of Apple the threat is high with many substitute products already on the market place and new ones constantly coming out and competing with many of Apple products. To counter this Apple maintains a strong brand, has many patents and constantly brings out new products ahead of the competition. With the brand, patents and new products Apple can charge high prices for its product as the branding makes their product superior to others in the market to some customers, therefore making a higher profit (Hill & Jones, 2009) (Apple, 2013).

The power of the buyer is the next of Porter’s (2010) five forces, for this force is it always important to remember the buyers are not just the people who use the products but can be retailers or wholesalers too. When there is a lot of buyer power the price of the product is lower so that the buyer can make more profit, the buyers tend to have a lot of power when they purchase in large quantities, people are dependent on the buyers, switching costs are low, buyers can buy from more than one company and when buyers can produce products themselves. In Apples case its customers have little buying power this is because Apple sells some products directly to the consumer and buyers do not tend to buy in bulk as the products Apple offer tend to be expensive with high profit margins (Hill & Jones, 2009) (Apple, 2013).

Another one of Porter’s five forces is the power of the supplier, the suppliers have power because they have what a business wants, but the buyer has power too the result of these powers is the end price. Suppliers a have a lot of power when what they supply is in high demand, what they supply is unique and when the supplier has the ability to vertically integrate. Apple retains power over its suppliers by buying many different components from different suppliers and in Apples case it has more power than its suppliers this means it can get supplies cheaper and keep costs low (Hill & Jones, 2009) (Apple, 2013).

Competitive rivalry is another one of Porter’s (2010) five forces and is how competitors affect a business. Apples competitors are few when compared to some other businesses but Apple’s competitors are large, make a lot of money and are therefore powerfully influence the market, likes of which include Google, Facebook and Amazon (MarketLine, 2012). To compete Apple itself has to be large and have a strong brand, however there are signs that Apple is weakening, Apple’s share price peaked in In September 2012, at $700 per share, since then prices have been falling and the company has lost $230bn off its value. It is said to have lost its inspiring view but it did still feature in the top 10 brands perceived to be the most "visionary, inspiring, bold and exciting" but it did lose to one of its rivals, Google, after having a previous reputation as being more inspiring. This means that Apple is no longer able to compete as well possibly because of the death of Steve Jobs previous Chief Executive (BBC News, 2013) (Apple, 2013).

Sources

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