According to Michael Porter (1979), industry is being influenced by five forces.

The

strategic business manager planning to develop an advantage over rival firms can use

this model to better understand the industry plans in which the firm operates.

Porter’s Five Forces

New
New entrants
entrants

Bargaining
Bargaining
Bargaining
Rivalry Power of
power
power of
within customers
suppliers
suppliers
industry
industry

Threat
Threat of
substitutes

Source - Porter ME, (1979), 'How competitive forces shape strategy', Harvard Business Review.

Competitive Rivalry (Growth and Competition)

Barriers to Adoption of iPhone

Since iPhone is only offered by single networks such as O2 in UK and AT&T in US,

customers of other networks will have to wait until their contract expires, or pay an early

cancellation fee (typically $200). The average duration of a cell phone contract is 2 years,

which means that 25% of consumer’s plans will expire in the next 6 months. Since a

$200 switching fee makes the iPhone very expensive.

Growth Potential

It is likely that future releases of the iPhone will not be restricted to any single network

for example AT&T in US, O2 in UK, and T-Mobile in Germany and Orange in France.
This would increase the potential market for the iPhone. It will also reduce the problem

of growth in market share.

Pricing Policy

Pricing:
Model Price
4gb model 499
8gb model 599

Source - By Michael S. Rosenwald (2008), “The Financial Lobe”, Putting Prices Into Focus,
www.washingtonpost.com

Apple introduced the device at high price for early adopters to earn abnormal profits and

it slashed down iPhone price by 50% for rest of market segment. For Reference, In US

When it reduce the price from $599.99 to $399.99 consumer were force to deal with the

mobile carrier AT & T mobility, in service package ranging from $59.99 to 99.99 per

month. But in UK, low amount of inclusive minutes was not competitive. For reference,

O2's iPhone deal allowed 200 inclusive minutes for pound 35 versus competitors that

offers of 750 minutes in addition to a free phone. Apple reduces its prices or introduces

new models for price-sensitive consumers, and its sales could expand considerably.

Distribution

Unlike iPods, which are available through many retail channels, the iPhone will only be

sold through Apple stores and single network stores. For instance, iPhone was available

through 1300 Apple, O2 and Carphone warehouses shops in UK.

 Barriers to Entry/ Threat of New Entrants

Ultimately the iPhone is going to face the most competition from imitators who can sell a

similar or comparable device at a lower price. Most of these threats are going to come

from established players in the cell phone industry (such as LG and Samsung) rather than

companies trying to enter the cell phone market. Software companies such as Google and

Microsoft may pose a credible threat at entering the cell phone market.

Apple not only had to face a number of barriers to entry in the development of the iPhone

but they must also worry about potential competitors (Google, Microsoft) overcoming

them as well.

Economies of Scale

Apple already had pre-existing experience in manufacturing mass-market consumer

electronics devices, many of which share components of the iPhone; so Apple was not

adversely affected by this barrier. New entrants, however, may not have that luxury and

the cell phone market is almost defined by its mass-market (which requires mass

production and consumption) nature.

Product Differentiation

The iPhone is significantly different than its competitor’s product. Apple also has a

certain amount of protection through the strength of its brand identity. iPhone launch was

extremely different technology from other mobile companies. But to keep product

differentiation consistent in long run would be challenge for Apple.

 Features

• Smart Phone
• Wireless Internet Communication Device
• iPod
• PDA, Computer and Camera

Software Capabilities:

• Full OS X
• Multi Tasking
• Networking
• Syncing
• Low Power
• Security
• Video
• Cocoa
• Core Animation
• Graphics
• Audio
• Widgets

Technical Specifications:

Screen size 3.5 inches

Screen resolution 320 by 480 at 160 ppi

Input method Multi-touch

Operating system OS X

Storage 4GB or 8GB

GSM Quad-band (MHz: 850, 900, 1800, 1900)

Wireless data Wi-Fi (802.11b/g) + EDGE + Bluetooth 2.0

Camera 2.0 mega pixels

Battery Talk / Video / Browsing - Up to 5 hours

Audio playback - Up to 16 hours

Dimensions 4.5 x 2.4 x 0.46 inches / 115 x 61 x 11.6mm

Weight 4.8 ounces / 135 grams

Source – www.apple.com/iphone/features/

Capital Requirements

Apple enjoys a slight advantage here, though it’s an advantage that may be quickly lost.

The other cell phone manufacturers have a lot of experience making cell phones, but not

necessarily software. So, to most effectively compete with the iPhone they will need to
invest significantly in certain areas. And Apple also has a lot of experience making

hardware and software, which gives them an advantage to some extent over their

competitors. In this sense, Apple itself did not face much problem with this barrier

because of their experience creating both software and hardware. Future competitors

looking to enter the cell phone market are less likely to have that advantage.

Distribution Channels

The iPhone will be only available at Apple and single network stores and it is only

supported by the Single network such as o2 in UK. They are not able to sell iPhone in

cell phone market and also they are making it difficult for people to even purchase the

phone. A future entrant into the market may be able to make their product available for

multiple carriers and multiple retailers. For instance, iPhone was available through 1300

Apple, O2 and Carphone warehouses shops in UK.

Supplier Power

The iPhone software that brings all features together and allows the user to interact with

the phone in a compelling way. And Apple, of course, developed and owns the software.

A producing industry requires raw materials - labour, components, and other supplies.

This requirement leads to buyer-supplier relationships between the industry and the firms

that provide it the raw materials used to create products. Suppliers, if powerful, can

exert an influence on the producing industry, such as selling raw materials at a high

price to capture some of the industry's profits.

Marketing
Network Billing Components Design Build OS / UI Apps Branding User
Sales

Primarily Outsourced

Primarily Apple

Source – Texty Staff (2007) “iPhone: Who's the real manufacturer? (It isn't Apple), www.texty.com
But in case of Apple, The Software, Hardware, component is developed and owned by

Apple itself. Hence, they have less threat from powerful suppliers.

Buyer Power

Here you ask yourself how easy it is for buyers to drive prices down. Again, this is driven

by the number of buyers, the importance of each individual buyer to your business, the

cost to them of switching from your products and services to those of someone else, and

so on.

Although the iPhone’s functionality would be attractive to business users, its price is

considerably higher than that of Blackberries .This makes enterprise purchases unlikely,

since businesses are typically price sensitive.

However, the iPhone’s compelling mix of features makes it attractive to a broad set of

cell-phone consumers. The iPhone’s market is limited by two factors: 1) the high price

($499 for 4 GB) and 2) Apple’s exclusive US carrier agreement with Cingular. (For

example AT & T, O2)

In case of Apple the buyers of the iPhone are somewhat more powerful. Given the

relatively high price of the iPhone it remains to be seen whether consumers will pay a

high price for Apple iPhone features when their needs may be equally met by cheaper

alternatives.

Threat of Substitutes

A threat from substitutes exists if there are alternative products with lower prices of

better performance parameters for the same purpose.

The iPhone mainly distinguishes itself from competitors over its software’s and

hardware’s which are driven by a multi-touch screen. Apple claims various patents

relating to this technology. However, it is still likely that other players in the market will
soon be able to deliver similar products. Synaptics and LG have already disclosed details

of coming products which feature touch-screen interfaces, as well. Software companies

such as Google and Microsoft may pose a credible threat at entering the cell phone

market.

Evaluation

Being aware of huge competition in mobile phone market, I decided to use porters five

forces model to do analysis and based on analysis, I found that there is tough competition

for mobile operators who act as both substitutes and new entrant. In the next 3-5 year if

we see the industry would be more competitive than today. So many firms will be

competing in the market and new firms will be try to come in the market for taking the

advantage of profitability, which would reduce the profit of the firms. Consumer will

have more choice because of substitution, and they can force the companies to reduce the

prices of their product. And the supplier will have the power to raise the price of the raw

material because of the high demand on the same time.

According to Michael Porter, (1985)

When a firm sustains profits that exceed the average for its industry, the firm is said to

possess a competitive advantage over its rivals. The goal of much of business strategy is

to achieve a sustainable competitive advantage.

Michael Porter identified two basic types of competitive advantage:

• cost advantage

• differentiation advantage

Differentiation advantage for Apple (Product differentiation strategy)

For other device manufacturers getting into this market may be important. The problem is

that they have to try to develop a product that not only matches the iPhone but give
competition to it. This is where competitive advantage comes in. Features such as touch-

screen capability, internet access, large memory capacity and, crucially, design are all

things that the iPhone has been well known for. For other manufacturers to come up with

something better takes time, research and funds - simply copying the iPhone is not that

easy. The features are what give Apple the competitive advantage, and the fact that it is

not easy to reinvent those features quickly is what makes the competitive advantage

defensible. Apple has managed to create a Macintosh computer with mobile phone

capabilities, bundled within an Internet enabled PDA and an iPod body. The iPhone

combines smart phone capabilities with a simple to use graphical interface projected on a

large ‘multi-touch’ display with Wireless Internet Communication Device.

Style-conscious cell phone consumers who would like to browse the Internet and enjoy

entertainment t, the iPhone is a smart phone that combines a web browser, email, iPod

and personal computer into a single, fashionable, easy-to-use device.

Cost advantage for Apple (Price based strategy)

Apple’s plan of slashing down the price of iPhone by $200 after few months of its

release. So what's strategy behind the price drop? Is it a long-planned strategic move to

pick up a second category of customers following those early adopters for whom price

was no object. Here the company target the price sensitive market segment. When it

reduce the price from $599.99 to $200, now US consumer were force to deal with the

mobile carrier At & T mobility, in service package ranging from $59.99 to 99.99 per

month.

The iPhone - Sustainable Competitive Advantage

What could give an iPhone an edge over its rivals? The question is that Apple Company

is going to sustain with this competitive advantage forever or not?

 • Smart phone – software and applications of Apple are highly reliable and have

good brand identity and are user friendly.

• Hardware invented by Apple is fashion trend and style-conscious cell phone.

• PC Expertise – As software and hardware are owned and developed by Apple,

they are expert in the applications introduced for iPhone.

• Apple has a brand identity and loyal customers.

• The Apple store and complete security for handset build goodwill for company.

• Even if Apple’s competitors produce copies of the iPhone, they will struggle to

compete because of Apple’s first mover advantage that will likely cause

consumers to associate similar products with the iPhone (similar to what has

happened with the iPod).

Evaluation

If we see the above theories, author said that if the organization wants to have sustainable

competitive advantage than its product must be less imitable but in the case of iphone, the

biggest rival of the company LG, SAMSUNG have already announced their touch screen

phones as a substitute of iphone.

If the company want to sustain on the bases of price based strategy then it would not be

possible for the long time, because iphone will have to face the competition, so the

company will have to spend more money on the advertising for selling it’s product which

will increase the cost and one possibility is that supplier can raise the prices because of

the more demand of the raw material.

According to Begg et al (2001) The Market structure is a description of the behaviour

of buyers and sellers in that market. That means the behaviour of buyers and sellers in the
 market is dependent on the structure of the market .so it is important to study the different

structures of the market, they can be explained with the help of competitive spectrum.

Perfect Monopolistic Oligopoly Duopoly Monopoly

MOVEMENT IN APPLE INDUSTRY

Source- Anon (2007)

In the above diagram as we move from right to left the number of sellers will increase,

the structure of the market changes and with the change in the structure the conduct and

the performance of the firms changes. Here Apple initially started with monopoly and

moves towards oligopoly because of other large firms such as SAMSUNG, RIM etc

enters the market to give competition to Apple with new product and low price.

The following box explains the different market structures.

VARIETIES OF MARKET STRUCTURE

TYPE OF MARKET NUMBER OF NATURE OF BARRIER

STRUCTURE SELLERS PRODUCT TO ENTRY

Perfect competition Many All firms produce None

Identical products

Monopolistic Many Different firms Minor

Competition produce somewhat
Different products

Oligopoly Few Firms may produce May be

Identical or Different considerable
Products
Monopoly One Unique product May be
considerable
Source - Sloman, (2003),

Baumol and Blinder (1988)

This change in the market shares shows us that the structure of worldwide mobile phone

industry changed with time, earlier it was more of monopolistic structure but in present it

is close to monopoly. The calculation of concentration ratio will be useful for

understanding the structure of the worldwide mobile phone industry. The following box

shows the 3 firm and 5 firm concentration ratio’s with the lapse of time.

CONCENTRATION RATIO’S FOR MOBILE PHONE INDUSTRY

Years 2005 2006

3 firms
Concentration 62.9 67.7
Ratio

5 firms
Concentration 75.9 81.4

Source – Case Study (Exhibit 1)

From the above concentration ratio’s we can conclude that the mobile phone industry has

changed with time. In 2005 3-firms concentration ratio was 62.9% that means that more

than half of the market was controlled by 3 large firms but with the change of time they

expanded less that in 2007 they were controlling the 67.7% of the market. And if we

consider the 5-firm concentration ratio in 2005, the 5 firms of the mobile phone industry

were controlling the 75.9% of the market; this means the firms have moved from

monopoly market structure to oligopoly were few firms dominate the market, Griffiths &

Wall (2000).According to Sloman,(2003) Oligopoly has two different directions in an

industry.,
 • The interdependence of firms may make them wish to collude with each other. If

they could club together and act as if they were a monopoly, they could jointly

maximise industry profits.

• On the other hand, they will be tempted to compete with their rivals to gain a

bigger share of industry profits for themselves.

According to Sloman, (2003), the more is observed that firms compete to gain a bigger

share of industry profits, and in turn smaller these industry profits will become. Due to

price competition in market it will reduce prices for mobile phone devices for Apple and

because of competition through advertising it will increase the industry cost. So,

ultimately it will reduce the industry profit for Apple. But here in long run Apple should

collude with other large firms in market because of interdependence. According to

Sloman, (2003), each firm will be affected by its rival decision. Firm recognise this

interdependence. No firm can afford to ignore the actions and reactions of other firms in

the industry.

Industry under collusive oligopoly

Pound
Industry MC

P1

Industry AR
Industry MR
O Q1 Q
According to Sloman, (2003), when a firm under oligopoly engage in collusion, they may

agree on prices, market share, advertising expenditure etc. Such collusion reduces the

uncertainty they face. It reduces the fear of engaging in competitive price with

advertising which could reduce total industry profits. A formal collusive agreement is

called cartel. The cartel will maximise profits if it acts like a monopoly, if the members

behave as if they were a single firm.

The total market demand curve is shown with corresponding market MR curve. The

cartel’s MC curve is the horizontal sum of the MC curves of its members. Since we are

adding the output of each of the cartel members at each level of marginal cost. Profits are

maximised at Q1 were MC = MR. The cartel must therefore set a price of P1 at which Q1

will be demanded. As members will agreed on cartel price they should compete with each

other by using non-price competition strategies to gain big share at price Q1.

Evaluation

Following are the events that will influence the Apple Company to move from Monopoly

market to Oligopoly. When more firms producing the same products enter into the

markets it increases the competition in the market. According to Sloman, (2003),

whenever firms enter the market, increasing the competition, selling products with low

prices it is understandable that the profit margins are to reduce. On the basis of above

theory, Apple is not an exception to competition. This competition will influence its

markets structure, conduct and performance.

 Bibliography

Apple, (2009)“Features of iPhone,[online] available from:

www.apple.com/iphone/features/ [Accessed date 21 December 2009]

Begg et al (2001) foundations of economics Berkshire : Mc graw-hill Education

Baumol and Blinder (1988)fourth edition Economics principles and policy

Florida : Hartcourt Brace Jovanovich

Rosenwald, M. (2008), “The Financial Lobe”, Putting Prices into Focus,[online]

available from: www.washingtonpost.com [Accessed date 12 December 2009]

Porter, M.E. (1979), "How competitive forces shape strategy", Harvard Business Review,
Vol. 57 No.2, pp.137-45.

Porter, M.E. (1985), Competitive Advantage, Free Press, New York, NY, .

Sloman, J., 2003. Economics: with the collaboration of Mark Sutcliffe. 5th ed. Harlow:
Pearson Education.

Texty Staff (2007) “iPhone: Who's the real manufacturer? (It isn't Apple), [online]
Available from www.texty.com [Accessed date 9 December 2009]