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A Case Study on Apple Iphones

Essay by   •  July 26, 2015  •  Case Study  •  1,523 Words (7 Pages)  •  967 Views

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Contents

1.        Introduction        

2.        How Apple iPhone has been differentiated        

3.        Existing barriers to entry and exit in the smart phone market        

4.        Degree of control over price of iPhone that Apple enjoys        

5.        References        


  1. Introduction

Apple Inc. is based in Cupertino, California. The company designs, manufactures, and markets a variety of consumer electronic products and for the purpose of this assignment, we will focus on Apple iPhones which generate 55% of Apple’s revenue (Papke & Williams). Even though the iPhone has a smaller market share of 14% worldwide (Kovach, 2015), Apple reigns the smartphone world with its loyal customer base believing it to be superior and in the rest of this report we will examine and explore why.

  1. How Apple iPhone has been differentiated

Apple attempts to increase market demand for its products through differentiation, which entails making its products unique and attractive to consumers. The company’s products have always been designed to be ahead of the curve compared to its peers. Despite high competition, Apple has succeeded in creating demand for its products, giving the company power over prices through product differentiation, innovative advertising, ensured brand loyalty, and hype around the launch of new products.

On the other hand, it’s also hard to come across an inferior Apple iPhone. Generous profit margins and a tight control over its distribution channels have enabled the consumer electronics giant to produce superior quality goods at prices that only modestly exceed those of rival products. Thus, arguably, consumers enjoy a better overall experience in the long term.

Apple’s business strategy leverages its unique ability to design and develop its own operating systems, hardware, application software, and services to provide its customers new products and solutions with superior ease-of-use, seamless integration, and innovative design. Known for its innovation, Apple has established a unique reputation in the consumer electronics industry and has a loyal customer base for reasons as diverse as its philosophy of aesthetic design to its unusual advertising campaigns. The company believes a high quality buying experience greatly enhances its ability to attract and retain customers. So Apple’s strategy also includes enhancing and expanding its own retail and online stores and its third-party distribution network to effectively reach more customers and provide them with a high quality sales and post-sales support experience.

Apple’s founder, Steve Jobs’ vision for Apple was always to create a premier product and charge a premium price. Apple’s cheapest products are usually priced in the mid-range, but they ensure a high-quality user experience with their features. The hardware and user interface are designed to provide a lot of value for the price, which keeps profits high. However, a company can charge a premium price as long as it has a competitive advantage, and analysts believe the brand is on the way to losing its “aspirational” status. (Casteleyn, 2013)

  1. Existing barriers to entry and exit in the smart phone market

Some of the top competitors in the technology industry Apple competes with include, Google Inc., Microsoft Inc., Hewlett-Packard Company and Blackberry Ltd. And their respective market share is shown in figure 1 (Papke & Williams).

[pic 1]

Figure 1: Worldwide Smartphone Market Share (2013-2014)

The barriers for the new entrants as well as barriers to exit for the existing players can be discussed in terms of multiple aspects.

  • Economies of Scale

Apple’s economies of scale, both internal and external, give it a clear advantage over its competitors in the same industry. Apple’s internal economies of scale were established through its learning curve and volume of production. It has been in the industry for a while to have a leg up on competitors like Samsung by figuring out how to lower their production costs and analyzing their market better. Apple’s external economies of scale give them an advantage thanks to its location. California is the Mecca for the computer industry in the U.S. As such, suppliers naturally flock there and computer workers can easily share their ideas and build off of another. Therefore, Apple gains a significant advantage of lower supply costs and a more intelligent labor pool.

  • Product Differentiation

The technology sector is a tough market to enter regarding product differentiation because of the innovative powerhouses currently there, such as: Apple, Google and Microsoft. When you have companies currently present that have already matured and gone through the learning curve it is hard to match their prices, and all their expenses are much lower compared to yours. These high barriers give the companies like Apple an advantage and form of protection against new up and coming companies who try to compete. Trying to beat the innovative nature of these companies is unarguably a tough task.

  • Capital Requirements

Most capital requirements needed to start a new business or compete in a particular sector are normally high, but it is remarkably high in the technology sector since technological products are not cheap, highly skilled human capital is additionally needed and high R&D costs to innovate.

  • Access to Distribution Channels

Another high barrier to entry is bigger companies already locking down the major suppliers in the region. This occurs due to existing players forming contracts with major suppliers, new entrants failing to match what other companies currently pay and higher costs associated with premium suppliers.

  • Expected Retaliation

In addition to the above, a potential new entrant to the market may experience reactions from the existing players in the form of, large companies with excess cash flow can hinder new companies, distribution channel leverage of present companies and if truly threatened, attempt for buy-outs.

  1. Degree of control over price of iPhone that Apple enjoys

The strategy for Apple has four pillars:

  • Offer a small number of products.
  • Focus on the high end market
  • Give priority to profits over market share
  • Create a halo effect that makes people starve for new Apple products (Nielson, 2014)

Apple sells its products and resells third-party products in most of its major markets directly to consumers and SMEs through its retail and online stores and its direct sales force. The company also employs a variety of indirect distribution channels, such as third-party cellular network carriers, wholesalers, retailers, and value-added resellers. (Arvidson, n.d.)

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