STRATEGIC ANALYSIS OF APPLE 1. Analyse Apples external environment in the case using the PESTEL model. 2.

Perform an industry analysis for the Apple iPhone in the Chinese mobile telecom market using Porters 5-Force model. 3. Outline strategies being applied by the following players in the Chinese mobile telecom market: a) Apple b) Apples competitors (Nokia, Motorola, Samsung, Sony Ericsson, etc.) c) The grey marketers (fake producers)

Solution 1. Analyse Apples external environment in the case using the PESTEL model. Despite Apples considerable resources and capabilities, various trends within the General Environment pose considerable threats to the ongoing success of the firm. Proper planning and action will allow the firm to marginalize these threats while leveraging core competencies to take full advantage of emerging opportunities to create value for customers and shareholders. Political/Legal Environment Potential FCC Internet Regulation - The debate over Net Neutrality has entered the political arena, with bills being drafted in Congress and the FCC waiting in the wings to impose regulation if need be. Changing the way the Internet operates may de-incentivize new innovation which could reduce future value to be derived by Apple. New and innovative technologies are routinely iterated on by hardware companies who strive to offer the best

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methods of integration in their new products. Reducing this innovation may stifle new value creation for Apple. Healthcare Reform - The push for modernization of the American healthcare system in proposed reform legislation would provide government money for infrastructure development and implementation by care providers. Adaptability of Apples key portables in innovative health-centric ways could provide new sources of revenue. Economic Environment Recovering economy - While the economy in the United States has shown some improvement and there are signs of full recovery looming the outlook is not certain currently. The uncertainty leaves consumers weary of big-ticket purchases like computers. Apples premium pricing position leaves the firm at a disadvantage to less expensive competing products. However, when consumers directly feel the improving economy and spending increases Apple will well be positioned. Consumers seeking to treat themselves following the economic upturn may be attracted to Apples premium portables, viewing them as luxury goods. Apple, known for its quality, dependable machines, and excellent customer service may also be seen as presenting a better value than the competitors with fewer frills at lesser prices.

Flattening of wages -- leveling affluence - Over the past several years the American middle class has experienced increasing costs across many indicators including, healthcare costs and the CPI, but wages have remained relatively stagnant. Apples high prices may send potential customers into the hands of competitors when they are unable to justify Apples high price tags. Counter-intuitively Apples perceived value has directly benefited them

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during the economic downturn; theyve continued to experience growth while other competitors suffered.

Socio-cultural Environment Increasing desire for on-the-go devices - The importance of the Internet and connectivity is driving a demand for access anywhere, using high-speed wireless technologies. Smartphones, and other ultra-portable connected devices, that allow users to carry access to the Internet wherever they go are fast-growing compared to traditional personal computers. Apple and other manufacturers face a loss of relevance in the new technological landscape, driven by consumer preference. Again, Apples substantial investment in research and development in highly popular devices like the iPhone place Apple at the forefront of this transition.

Technological Environment Device convergence - The possibility that ordinary personal computers (and portable personal computers) will become less relevant through increased device convergence is very real. Apples products laptops will be less important in users daily use as their multi-function devices meet most of their needs. Apple stands currently as a leader in innovation and portable technology. They are conveniently positioned to become a market leader in convergence devices by iterating on their current portable devices and mobile devices like the iPod Touch and iPhone. Shortening product lifecycle - An ever increasing pressure to innovate because of shortening product lifecycles could result in missed opportunities due to market entry times and losses
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on obsolete inventory. Apples lean manufacturing value chain is adapted to rapid turnover and can be leveraged to combat the threat of inventory obsolescence. Apple currently invests billions of dollars in research and development which can be leveraged to position Apple at the head of industry innovation, staying ahead of competitors in lifecycles shifts.

Environmental The production and shipment of Apples devices are considerable sources of carbon emissions and pollution, which may come under scrutiny as consumer concern for the environment continue to grow. Apple has already made

commitments to greener manufacturing practices as well as implementing the use of ecofriendly components, and packaging. This proactive step can be used as a marketing tool to garner greater respect from concerned customers.

2. Perform an industry analysis for the Apple iPhone in the Chinese mobile telecom market using Porters 5-Force model. i. Bargaining Power of Suppliers The term suppliers comprises all sources for inputs necessary to provide products. And supplier power refers to their relative bargaining power, which, when high, allows significant influence on the industry and expropriation of profits. Suppliers tend to be powerful when they are concentrated or organized, when they can integrate downstream, when there are few substitutes, when the supplied product is an important input, and when the costs of switching suppliers are high.

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Generally, the passage is silent on the inputs and input sources of the iPhone. But two inputs can be identified namely the operating system and the hardware components. Apple, however, is known to develop its own Mac iOS for its non-PC devices.

ii. Bargaining Power of Buyers Customers bargaining power is likely to be high when they buy large volumes, there is a concentration of buyers and there is the possibility for the customer integrating backwards. Buyers are generally powerful in the Chinese markets for two main reasons; 1. The sheer large numbers 2. The availability of wide range of cost cutting alternatives

Chinese consumers are usually price-conscious and at the same time show equal interest in advanced mobile phone features. The premium prices charged by apple for its iPhone means that it, comparatively, constitute a higher proportion of the of the buyers total purchase hence buyers will be free to swithch to cheaper alternative granted that switching is not costly. For instance when iPhone is offered with service plan for 2 years, it would cost nearly $3,120 whereas, the average cost of smartphone in China is $350 iii. Threat of New Entrants This describes the degree of freedom with which new firms can join the mobile phone industry in china. Seriousness of the threat of entry depends on the barriers that is present and on the reaction from existing competitors that the entrant can expect. The threat of new entrants will be high when entry barriers are low and exit barriers are high. The entry barriers in the china mobile phones markets is conspicuously low given that increasing number of license are granted to local as well as foreign firms to join the market
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and the governments drive to encourage local firms to join the industry. The government encouraged domestic mobile handset makers by issuing licenses for manufacturing both GSM and CDMA handsets. In 2004, 49 licenses were issued As well the booming grey market which is an indication that there are no or very little restraints in their way to joining the market. Additionally, it will be less costly for the buyers to switch because other handsets in the Chinese market possess similar features as the iPhone. iv. Threat of Substitutes Substitutes are alternative products that may satisfy same need of a consumer. Substitute products or services can limit the potential of an industry by placing a ceiling on the prices it can charge An industry is unattractive when there are actual or potential substitutes for the product(s). Even before iPhone enters china, other global gaints are said to have made significant strides in providing smartphones that deliver similar functions as the iphone. The treat of substitues is very high in the Chinese market and promises to get higher.

The Chinese grey market comprises of mobile handsets (fake ones) that are unrecognised by the government. The fake mobile phones in China are produced by unlicensed vendors, who benefit by evading tax and other mandatory issues and earn profits by gaining cost advantage in the production process. Vendors from grey market also offer mobile phones with advanced features like Wi-Fi, Microsoft Windows Mobile operating system, Bluetooth, etc. As the grey handsets began competing with legitimate cell phones in terms of features and functions, their exports in the global mobile phone market also increased. The shipments of China's fake mobile phones increased from 37 million units in 2005 to 101million units in 2008 and are further expected to increase by 145 million by the close of 2009.

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v. Competitive Rivalry The intensity of rivalry among competing firms tend to increases as the number of competitors increase, when competitors are roughly equal in size and power among others. Quantitatively rivalry is identified and measured according to industry concentration ( i.e. the equality in size). Thereare two of these measures Herfindahl-Hirschman Index (HHI) Four-Firm Concentration Ratio

A low concentration indicates a competitive or fragmented market composed of many rivals, none having significant market share. (A large number of firms increase rivalry.) Conversely, a high concentration indicates less competition; a small number of large firms hold most of the market share. Judging by the number of firms in the market alone it can be said that there is intense rivalry in the Chinese mobile phone markets. From the case study, there are about nine firms identified (excluding 49 that acquired new licenses) which on the face value may be portray intense competition. But juxtaposing this with the overwhelming population of china, a good estimate of the total market demand is needed to arrive at a concrete conclusion. More so, since the Chinese smart phone market is primarily controlled by Nokia and Motorola, with a collective market share of 89.15% in Q3 2008. It can be said that rivalry in the industry is not as keen as to make it unattractive to Apple Inc. Below is a list of competing firms, identified in the case study, in the chineses market: Foreign Players 1. Motorola 2. Ericsson
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3. 4. 5. 6.

Nokia Philips Siemens Alcatel.

Local Brands 7. Ningbo Bird 8. Konka 9. TCL. However while the competition amongst these identifiable players may not be called very stiff, they all are facing competition from counterfeiters and unlicensed mobile phones firms in China. The number of these counterfeiters may just be overwhelming large enough to qualify the industry for intense rivalry.

3.

Outline strategies being applied by the following players in the Chinese mobile telecom

market: a) Apple b) Apples competitors (Nokia, Motorola, Samsung, Sony Ericsson, etc.) c) The grey marketers (fake producers)

3a. Strategies being applied by Apple Targeting Emerging Markets

1. The market potential of emerging economies represents huge opportunities that Apple can tap on. Apple is using this to tap into China. This was done with China Unicom,
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the 2nd largest mobile carrier in China after several attempts to sign a deal with China Mobile proved futile. Apple signed a 3 year non-exclusive license agreement with China Mobile deal. In the US, Apple managed to land a deal with AT&T.

2. Apple is also pursuing a broad differentiation strategy. Apple differentiates by offering high-quality, exceptional design, and personalized service. The scope of their strategy is broad targeting customers ranging from unsophisticated beginner users to specials needs power-users. This is seen in the design and price of the I Phone.

3. Design innovation is being used by Apple which is done by putting additional emphasis on design development with internal resource allocation to continue to lead the industry in design. When the I Phone was first launched in the US, it was named the Invention of the year by the Time Magazine, because of its design, features and touch screen technology.

Apples competitors (Nokia, Motorola, Samsung, Sony Ericsson, etc.) Product Development: The local brands designed handsets similar to the foreign brands and offered them at low prices and developed sales channels of their own in order to beat the foreign players like Motorola, Nokia etc which relied on wholesale agents for marketing and distribution. These foreign brands focused on low-end handsets and catered for consumers of all segments. They reduced the prices of mobile handsets and promoted colour-screen phones with many other features. To remain competitive however, foreign players moved from sales

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promotion and developed their products. This strategy gave them competitive advantage over local players who focused on selling and distribution.

Related Diversification: Most of the foreign handset brands developed mobile phones based on consumer choices. Nokia for instance designed mobile phones with the price and design preferences of Chinese consumers in mind and diversified their product portfolio to cater for all the consumer segments. Motorola, Samsung and Sony Ericsson also attracted consumers with quality phones and enhanced features

The Grey Marketers (Fake Producers) Cost advantage/Pricing The fake mobile phones in China are produced by unlicensed vendors, who sell at bottom rock prices because they evade taxes and other mandatory obligations. This enables them earn huge profits by gaining cost advantage in the production process. Unlike Apple which gained access to the Chinese market through the legal channel, and therefore is subject to all taxes and other obligations, the grey marketers operate on the blind side of the authorities and so avoid paying any taxes. This enables them to sell their products at low prices. It was once reported that while Apples iPhone 4 is going on sale at different countries in the world, a Chinese knockoff company is selling iPhone 4 knockoff through a fake iPhone 4 product page site. Whats so funny is that the company shows a certificate of authorization on the fake website to let customers know that the iProducts are legally registered in China. So, maybe these people are telling you that they are Apple authorized reseller and you can get a real iPhone 4 from them, for just 1180 yuan (about $174). Product Features And Functions

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Vendors in the grey market also offer mobile phones with advanced features like Wi-Fi, Microsoft Windows Mobile operating system, Bluetooth, etc. As the grey handsets began competing with legitimate cell phones in terms of features and functions, their exports in the global mobile phone market also increased. The shipments of China's fake mobile phones increased from 37 million units in 2005 to 101million units in 2008. As illegitimate handsets are already offering several enhanced features and users are showing more inclination towards mobile phone internet access, the producers of the fake iPhones are making sure that these enhanced features are added to their fake products. This most likely makes the product look genuine in the eyes of buyers. Early Introduction The other strategy being used by grey marketers is to always move a step ahead to introduce the fake products unto the market before the entry of the legitimate mobile phones unto the Chinese market. Apple iPhone is one such example wherein the brand was unofficially sold in the Chinese mobile market much before its official entry into China. By so doing, the fake products are presented to buyers who have no clue as to how to check on their authenticity. After all, those are the only products on the market.

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