Apple Inc is a leading company for customer electonics. They are a multinational corporation with a headquater in California, US. Their product line includes iPod, iPhone and iPad for protable electronics; Mac for personal computers; iTunes for multi-media application and etc. In recent months, iPhone 4 and iPad are widely discussed since it launched. A big crowd queueing at Apple flagship store on the first day of new product launch are quite common nowadays. As time goes by, press conference or new product launchment from Apple became the most looking forward event for technology euthusiasts.
Liu Chuanzhi, chairman of Lenovo, feel happy with Apple’s decision of not officially entrying China market (Reuters 2010). Liu’s speech may inspire Apple CEO Steve Jobs. On 10 Jul 2010, Apple opened their second store in Shanghai, China. First Apple’s store opened in Beijing by 2008 and the recently opened store in Shanghai is an obvious strategic move (Mark 2010). Steve would further expand their market in China for consumer electronics. This paper is written to analyse the market environment of China, Apple’s internal resources and competencies and developing applicable strategic model for further appraisal. Analysis of Environment and Competitiors 2. 1 General Review of Strategic Environment Undeniably speaking, China is one of the biggest countries in the world. There was a rapid yet consecutive growth in economic in past decade. For social and culture aspect, she became more open and multidimensional. Sometimes decisions made by China Government may still far from public expectation. Nevertheless, their continuse improvement of stability and matarity make China a fruitful market. As a general review of strategic environment, realizing the market size and estimating market growth is an essential step to start with.
For consumer electronics, it is estimated that the compounded annual growth rate is 12% from 2007 to 2010. This is the strongest growth among other developing countries. Analysts pointed that this remarkable growth are mainly leaded by an on-going trend of price drop of consumer products plus increase of disposal income of China citizens. It somehow facilitated people to spend more on electronic products. The report in which particularly mentioned that portable electronics like personal computer and cell phone have a relatively low penetration rate in the market.
Rooms for improvement is available in medium term (PRLog 2008). Such environment is rather attractive for a company like Apple who would like to extend their product life cycle by expanding in a fast growing market. 2. 2 PESTAL Analysis 2. 2. 1 Political There is a saying: China is world’s factory. The advantages of setting up a factory in China have been widely discussed. Cheap but skillful workers, tons of supplier, well established transportation network, all of them made China a perfect place to run a business. However, the planning for a greenfield investment in China sometimes backfire.
Google, world’s leading internet search engine, is one of the victims of China government censorship. China government use different ways to intercept Google’s clients data like emails from human right activists. Besides, news regarding Tibet or Liu Xiobo will be eliminated from the search result in Google China web site (Nick ; Jeffrey 2010). This is the trade off for doing business in China. We cannot foresee if Apple will face the same problem in future but they should bear in mind for the special features of local political culture. 2. 2. 2 Economic After 2008, many countries started recovering from finanical crisis.
China, comparatively, is doing the best by maintaining strong and consecutive growth since first quarter of 2009 and remind nearly 10% of growth in third quarter of 2010 in below Figure 2. 2. 2 (China GDP Growth Rate 2010). Steady growth of GDP is always wanted but growing too fast may lead to inflation problem. In 2010, China citizens face a common problem of soaring price of food and household products. As Such is a two bladed sword to foreign investor. On one side implied that China people is getting rich and be able to pay for premium priced product like Apple’s. On another side, overhead f running a business in China no longer cheap. Apple need to position themselves precisely to strike a good balance. Figure 2. 2. 2 China GDP Growth Rate 2. 2. 3 Social & Cultural China is world’s factory. It is not only applying to authorized production activities but also counterfeit products. Counterfeit products cover a wide range from daily use product to luxary watch. Some clones are actually nearly the same as the genius product as they are produced accordingly to exact specification. It is always questionable of how could people make it so close. The reason is the low recognition of intelligent property by local people.
It is quite common that an authorized production unit to over-produce or apply the production know-how in their subsidiary factory for counterfeit products. In addition, the implementation of intelligent protection by China government is disappointing too. Recently, Apple get really mad with one local China company called Meizu for their iPhone clone. Meizu was sued and forced to stop production for the clone product (Engadget 2010). Nonetheless, Apple will still suffer from time to time for simliar problems. 2. 2. 4 Technological For consumer electronics, technology support in terms of hardware and software are equally important.
Nowadays, touch screen device is the main stream among all electronics. Touch screen handhelds has been launched for years but the most admired one is from the first generation of iPhone. Such cutting edge screens are actually manufactured by a German company called Balda (Bloombery 2007). What’s more, other key parts are ordered from different countries as well shown in Figure 2. 2. 4. At the moment, factories in China are still non-capable to manufacture such sophisticated parts. Yet, with 1. 3 billion of people, this is the best place to gather skillful labor to carry out the assembly. G network connection capability became the basic requirement of most consumer electronics. Using a devices in a country without 3G network structure is simply a waste as most of the functions need a fast mobile data transmittion plan to support. Currently, there are two service provider in China including China Telecom and China Mobile (Frost Sullivan 2010). Both of them support the 3G network of most of areas in China. In another words, they made China a mature market for Apple’s product whereas 3G connection network is well established. Figure 2. 2. 4 iPhone Primary Contractors – a partial list (TEXYT 2007) Software and design |Apple |USA | |Assembly |Foxconn, Quanta, Unknown |Taiwan | |TFT-LCD Screen |Sanyo Epson, Sharp, TMD |Japan | |Video processor chip |Samsung |Korea | |Touch screen overlay |Balda |Germany | |Bluetooth chip |Cambridge Silicon Radio |UK | |Chip manufacture |TSMC, UMC |Taiwan | |Baseband IC |Infineon Technology |Germany | |WIFI Chip |Marvell |USA | |Touch screen control chip |Broadcom |USA | |CMOS chip |Micron |USA | |NOR Flash ICs |Intel, SST |USA | |Display Driver chip |National Semi, Novatek |US, TW | |Case, Mechanical parts |Catcher, Foxconn Tech |Taiwan | |Camera lens |Largan Precision |Taiwan | |Camera module |Altus-Tech, Primax, Lite On |Taiwan | |Battery Charger |Delta Electronics |Taiwan | |Timing Crystal |TXC |Taiwan | |Passive components |Cyntec |Taiwan | |Connector and cables |Cheng Uei, Entery |Taiwan | Note: This article is based on information supplied by KGI Securities, CLSA Asia-Pacific, published media reports, and other sources in Asia. 2. 2. 5 Environmental Concerns Unlike other industries, consumer electronics didn’t create obvious pollution problem during it’s production process. The overall pollution problem, howover, is rather disturbing for foreign investors. Heavy haze in Beijiang made flights delayed or cancelled.
More than 700,000 people died in a year due to air pollution and unclear water related problem. By roughly estimation, oneth-ten of GDP was used up to deal with pollution problem in China. As the world leading emitter of greenhouse gases, the challange China facing is critical. Severe environmental problem will definitely affect the suitability of running a business in one place (Le Figaro 2010). Foreign investors like Apple should take this into consideration seriously. 2. 2. 6 Legal System In 2008, new labor contract law launched in China to tackle the loophole of employees being stacked. Employment contract is not commonly used befoehand.
Even employment contract is drafted, this is no limitation for number of temporary contract over the same worker. It means that employer can form numerous of short-term temporary contracts with employees even the contract period is actually drafted on a consecutively base. By doing so, employer can skip the liability of severance payment in case of staff sacking. After announcing the new law, employer is asked to form contract with all their staff and turn employees to permanent after signing the 2nd contract with the same employee. In this regard, service period can easily and acuurately be chased (CNCI 2008). Meanwhile, it also implied that the cost of running a business will be higher after the announcement. 2. Competitor Profiling In this section, competitive profile matrix is used to analysis the strengthness and weakness of aforesaid competitors in consumer electronics market. Some rivals were dropped when considering their capability of offering a broad range of products. For example, Blackberry and HTC are doing particularlly good in smartphone sector but not beyond this. Skipping those competitors can enhance the comparativeness of this matrix. The market of consumer electronics is a world for technology competition. What consumers looking for is cutting edge technology. Under this assumption, the factor of “New and Exciting Product”was weighted most heavily.
Apple and Sony scored top rating in this factor for their innovating product design. In contrast, the factor competitive pricing was weighted least important. People will generally put a equal sign between technology and expensive. As consumer electronics doesn’t belong to essential commodity, demand is less sensitive to the change of product price. Moreover, such products are highly differentiated and to be considered as a solution to people’s life. Once consumer found the perfect solution for him, he will go for that option unless it is extremely expensive. In this factor, Dell is doing the best among other competitors due to their BTO and just-in-time (JIT) strategy for lowering inventory cost.
Apple scored lowest rating in this section but still maintain strong sales volume (quoted in below section 4. 1. 3). It implies that Apple’s consumers knew that they are buying premium priced product but they eager to do so. In short, Apple’s strategy of differentiating themselves by offereing cutting edge products are succeed. It allows them to charge consumers at a premium price. In order to maintain this position, R;D will be the most important input for further innovative product. Meanwhile, robust finanical status is equally important as it provides a healthy platform for further development. Figure 2. 3 Competitive Profile Matrix of Top Four Brand for Consumer Electoronics |Apple |Dell |Sony |Samsung | |Key Sucess Factors|Weight |Rating |Score |Rating |Score | Remarks: 1 = Major Weakness 2 = Minor Weakness 3 = Minor Strength 4 = Major Strength 3 Analysis of Resources, Capabilities and Financial Performance which Leading to Distinctive Competencies In this section, appraisal of resources, capabilities and financial performance are mainly based on latest Apple’s annual report. Below will try to consolidate key elements which bring distinctive competencies to Apple and analysis their causality relationship. 3. Sustainable Competitive Advantages 3. 1. 1 Tangible Resources By the end September 2010, Apple has US $51 billion in cash and or highly liquidable current asset which increasing by $17 billion since last financial year. Such significant figure was mainly contributed by strong sales during the year. With existing cash balance, Apple should find no problem to meet its operation needs such as purchasing capital asset, finishing outstanding commitments or passing financial stress test in coming year. Sufficient working capital guaranteed that normal operating activities keep running as usual. Besides, Apple’s capital expenditures are expected to increase substantailly from US$ 2. billion to US$ 4 billion in 2011. Most of the expenditures will be used for expanding the distribution network. It is expected that around 50 new retail shops will open and half of which are located outside US in order to maintain strong sales and increase market share in 2011. 3. 1. 2 Intangbile Resources Apples holds numerous patents, copyrights, trademarks and licenses over its products, designs, technology, services, etc both domestically and internationally. Though, clumsy application process did drastically holdback the original protective purpose. Sometimes, patents or sort of things may only be available after the product becoming outdated.
Nevertheless, Apple still strongly believed that the ownership of those intangible propeties is essential as it reserves the right to further apply its achievements from R;D and prevent other parties from infringing. Most importantly, personnel competence is another key resource Apple possessed. Patents and similar instruments are designed to protect break-through innovations. However, such achievements are actually relying on experienced, skillful and innovative personnel. Likewise, executive and marketing team are identically essential while they seamlessly work with each others for a desirable outcome. In this regard, attracting and retaining competent staff are the priority tasks for Apple to maintain its leading position. 3. 2 Capabilities
Globally expanding Apple’s retail shops is a strategic move which aims to guarantee absolute satisfaction shopping experience. To achieve such target, Apple further invested to bring eye-catching decorations to retail shops. Potential sellers are even provided product expertise for high level of integration and services support. Under Apple’s Premium Reseller Program, service and education oriented selling approach are to be further facilitated. Improved distribution capabilities is an overall expected result by this program. Thanks for powerful computing performance, networking capability, expandable platform with a series of highly integrated product line, Apple’s buyers are not limited to household users.
Currently, advance product users from business sector, multi-media design firms and even US government are buying software and hardware products from Apple. The leading technology capabilities from Apple enable them to extend their sales to the most demanding buyers in the market. 3. 3 Financial Performance Accounting ratio is a short-cut to review finanical performance of a company. In general, ratio review should be carried through comparison either with its previous performance or competitors in the market. For Apple, self comparison is more meaningful as its business is too diversified. Competitor with similar business nature may be not easy to find.
To obtain a comprehensive review, this appraisal will focus on three areas including profitability, efficiency and debt financing structure by comparing data from current year with previous five-years average (Forbes 2010). For profitability, gross profit margin and earning before interest and tax (EBIT) margin are 41% and 28. 4% respectively in current year, which is 2. 6% and 2% increase comparing with the norm. It represented that Apple is improving not only in terms of generating more sales but also controlling the operating expenses. For efficiency, return on assets and invested catipal are 18. 6% and 29. 3% respectively, which increased 2. 7% and 3. 2% comparing with the norm. Such change in figure implied that Apple can utilize their assets and capital in a more efficient way to generate revenue. It can also be explained as a result of good management.
For debt financing, both the current and the norm figure for total debt / equity ratio is zero. Debt-free operating philosophy is the reason for such figure. Debt-free is a safe approach but doesn’t mean the best strategy. With reasonable amount of debt financing, it enables more opportunities for a company to further expanding their market share with effective leveraging. 3. 4 Core Competencies There are countless factors which contribute to Apple’s succeed. Undoubtedly, R&D in which would be the most essential one. Under keen competition, consecutive and timely introduction of new product to marketplace is a must in order to survive in this industry.
Developing innovating technology for new or existing product, obtaining related intellectual propety protection, all of them have to be support by extensive R&D. Besides, Apple is the market leader at the moment. Their price setting is aggressive due to their cutting edge technology. In this regard, keep investing in R&D is necessary to maintain or even break through their market position and increase brand awareness. Similiarly, it is obvious that the core competitive advantage of Apple is to keep introducing new products on a regular base and at a right timing. This will remain the core competitive advantage for long term business strategy as well. Thus, further investing on R&D will be the way to follow.
Last, the most admired design and integrated package of hardware, operation and application are the key strengthness of Apple’s products. Most of these features are actually patended and of course the achievements from sucessful R;D projects. On the other hand, management of new products introduction is important too. R;D makes new product introduction available. However, there are still a basket of questions remain unanswered such as “how to manage the risk from the new product? “, “when will be those applications available? “, “how many stock should we keep in shop? “, “how to estimate the demand for the new product? “, etc. Without a team of experienced and competent management executive, a new product could not reach public effectively though it is the best. Potential Strategy Direction and Implementation 4. 1 Competitive Industry Environment Analysis by Porter’s Five Forces 4. 1. 1 Threat of Substitutes One of the selling point of Apple’s product is their unique design and the consistency looking throught their whole product line. From biggest machine like Mac to smallest in like iPod, customer can easily find that they are designed and built under the same theme, neat and simple. As time goes by, Apple built a strong brand image. People who use Apple’s product are associate with the characters like smart, trendy, fashionable but sophisticated. The linkage between using an Apple’s product with personal taste was strongly built.
Other company producing similar consumer electronics can compete in terms of hardware configuration. Considering the whole product package, however, no close substitute is available so far. 4. 1. 2 Threat of New Entrants Generally speaking, the entry of consumer electronics market is not prohibited by law. Anyone can join the market as he is interested. Besides legal consideration, technology know-how, brand name building and captial required for research and development (R;D) are rather hard for new entrants to compete with existing rivals. For instance, a good smartphone is not just putting the best parts together but need an operation system to link them up.
In addition, you need support from application and programme to developer to extend the potential to your phone to make it smart enough to attract customers. Such software development requires advance computing and programming skill. Without strong finanical support for long term R;D cost and technology know-how, it is nearly impossible to entry the market. In another word, threaten by new entrants is not worrying at all. 4. 1. 3 Bargaining Power of Suppliers In the first quarter of 2010, Apple sold around 3 millions of Mac, 9 millions of iPhone and 21 millions of iPod (Apple 2010). Such figure is material enough for any suppliers of Apple’s product.
With a bulk order size, Apple has a strong say over their suppliers and could obtain a rather competitive price. Yet, this is just a half of the story. Apple is extremely picky in selecting suppliers. Parts are specifically designed according to unique specification. Thus, technoloy know-how will inevitably share with suppliers. In this regard, switching suppliers may not benefit Apple at all. Moreover, as a US listed company, Apple faces hugh pressure in ethical issues. Recent Foxconn jumps, Taiwan based company who carry out assembly task for iPhone their Shenzhen factory, bothered Apple very much (Xinhua Net 2010). Nevertheless, Apple didn’t walk away from them.
It shows the relationship between Apple and its suppliers is interdepedent and Apple would keep a long term relationship with them. 4. 1. 4 Bargaining Power of Buyers For consumer electronics, buyers have a lot of choices over the market. Products serving similar purposes in different price range and with different specification are widely available. Competition is very keen but the bargaining power of buyer are surprisely weak. First, company accepting custom made order is rare in the market. Dell does offer build-to-order(BTO) service but still limited to standards components. Competitors are trying to differentiate their products and let buyers making decision according to their perference.
Second, some patended features of a product were developed and owned by particular company. Copying or imitating may lead to unwanted legal sue. Under such circumstance, companies are driven to invest on R;D for cutting edge technology to inpress potential buyers instead of pleasing individuals with custom built product. Above analysis is actually applicable to most of competitors in the consumer electronics market. 4. 1. 5 Rivalry in the Industry Apple’s competitors for consumer electronics can be divided into few portions. For desktop and laptop computer, Lenovo (after acquiring IBM), Dell and HP (after merge with Companq) are the top three competitors in the market.
Lenovo and Dell have dominated the market for general business usage while HP is more common for household. Comparatively, Apple’s Mac series is more into multi-media design industry. For portable multi-media devices, major competitors includes Sony and Samsung. Sony have longest history in portable audio plus solid experience in game console while Samsung works better in display panel and capable to design and manufacture chip processor for different purposes. Apple’s iPod or iPad is more concerning on daily applicaiton which aims to integrate your life seamlessly. For smartphone, this sector is way more competitive. Blackberry, HTC, Nokia, SonyEricsson, LG, Samsung, Motorola and etc are the key rivals.
Blackberry is leading device for secured business email usage; Nokia and SonyEricsson provides better dialogue quality as they are founder phone manufacturer; LG and Samsung have sharper dispaly panel benefited from their television technology know-how; HTC and Motorola focus on developing smartphone together with a widely expandable operation system – Android. Apple’s iPhone rather care about add-on applicaitons than above concerns. As a lot of programme developers support iPhone, it made iPhone a very unique position. iphone’s applications can map with individual needs their wide range of application collection. Below Figure 4. 1. 5 shows the catagories of application available in iPhone under offical App Store. Figure 4. 1. 5 Screenshots – catagories of application under App Store 4. 2 Strategy Implementation
Apple’s business strategy relys on its unique looking design and own developed hardware, application software, operating systems and services to obtain new products or solutions which is super easy to use, seamlessly integrated, and with innovating design. They believes that continual investment in R&D is essential for developing and enhancing the innovation of new products. Likewise, they should keep offering innovating and integrated solution such as hardware (Mac, iPad, iPhone, and iPod), software (iTunes), and applications (App Store). 5 The Evaluation of Strategic Management Models The first model used in this report is strategic environment analysis which focus general environmental elements.
Scoping the market size and growth can provide a forecast of strategic vision for a company while market share analysis help to locate company’s current position. Next used model is PESTEL for analysing general environment of China. It gives an overall view of the business environment by studying external concerns which may be considered as a difficulties or threats while further developing a company. In addition, company may find opportunties during the analysis. Yet, the downside of this analysis is too demanding for amount of information. Ironically, the analysis result is still assumption based only. Porter’s five forces is another used model to analyse industry environment. It helps to figure out the market’s attractiveness by using qualitative evaluation.
This is a entry level framework of general industry analysis which leads a company to position themselves. However, it ignored the linkage and interaction between buyers, competitors and suppliers. Thus, It fail to evaluate the attractiveness of industry effectively against company’s resources. Competitive profile matrix is also used to evaluate the competitive environment. It can find out the strengthness and weakness of a company and its rivals by rating the critical success factors. Those factors include both external and internal concerns in order to locate the areas where a company needs to improve. Moreover, it leads company to consider how could they distinguish themselves from their competitors.
Sustainable competitive advantage is the next analysis used for self accessment. It focuses on internal existing capabilities and resources to locate the core competencies of a company. This analysis helps in finding out which resource and capability contributing the best to the core competencies. The last used analysis model is focusing on the financial efficiency, profitability and gearing structure. Financial ratios can always obtain a quick reference of the financial status of a company. For instance, efficiency ratios implies the resources utilization; profitability ratios tells the profit generating ability and gearing ratios are vital indicator of survive potential of a company.
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