Investors and market analysts often seek different perspectives for market analyses to gain a better picture of a company's positions and strengths within its industry. One tool for fundamental analysis that goes beyond examining financial metrics such as the price-to-book ratio (P/B) is Michael Porter's Five Forces Model.
Key Takeaways
- 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.
The Porter 5 Forces Model
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.
Apple in the Marketplace From a 5 Forces Perspective
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 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. In mid-2023, it passed the $3 trillion mark.
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 appear in the future. Thecompany must continue innovating and building brand loyalty to keep potential competitors at bay.
Industry Competition
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 Google, Inc., the Hewlett-Packard Company, Samsung Electronics Co., Ltd., and Amazon, Inc., among others. 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 factor that makes the industry 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 computer. 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.
Bargaining Power of Buyers
The element of low switching cost strengthens the bargaining power of buyers as a key force. 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, and 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 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 of people who would not consider abandoning their iPhones in favor of another smartphone competitor.
The Threat of New Entrants
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 product portfolio before 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, the likelihood is remote for the immediate future.
Nonetheless, Apple needs 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 greater competitive disadvantage.
Bargaining Power of Suppliers
The bargaining power of suppliers is a relatively weak force in the marketplace for Apple's products. It's 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 too low to be a significant obstacle. Plus, Apple is a major customer for most of its parts suppliers, and its suppliers are understandably reluctant to risk losing the company's business.
The bargaining power of parts suppliers is not a major consideration for Apple or its major competitors.
The Threat of Buyers Opting for Substitute Products
Within the framework of Porter's Five Forces Model, substitute products are not direct competitors but possible substitutes. In the case of Apple, an example of a substitute product might be a landline telephone as a substitute for an iPhone. Not a fair fight, in other words.
For Apple, most potential substitute products have limited capabilities compared to Apple's products.
Who Are Apple's Competitors in Business Applications?
According to a 2023 survey by Gartner, the top alternatives to Apple for application development, integration, and management software were Google, Microsoft, and IBM.
What Companies Do Stock Traders See As Competitors to Apple?
Stock traders would consider the strongest technology companies as reasonable alternatives to Apple's stock. One list cites Samsung Electronics Co Ltd. (SMSN), Microsoft Corporation (MSFT), and Alphabet Inc. (GOOG) as its top three.
Where Is Apple on the List of World's Top Brands?
Apple stood in first place in Interbrand's 2023 list of the Best Global Brands. The rest of the top 10, in order: Microsoft, Amazon, Google, Samsung, Toyota, Mercedes-Benz, Coca-Cola, Nike, and BMW.
The Bottom Line
The Five Forces Model is a common-sense method of fundamental analysis that can be used to evaluate any stock. How tough are its competitors? How loyal are its customers? How vulnerable is it to innovation by others? How reliable are suppliers? How easy is it to replace?
Consider these five questions about a company and its products and you can come to a reasonable conclusion about which way the company's stock is likely to move in the near future.
