STRATEGIC ANALYSIS AND DECISION MAKING
WRITTEN ASSIGNMENT 1
I, Anthony Bechwati, acknowledge that I have adhered to the Academic Integrity Policy described in Merrimack College student handbook
October 17, 2019
The purpose of this report is to present a strategic analysis of Apple Inc. The company operates within the technology industry. The following sections will provide the reader with a better understanding about the companys history, current strategy of the firm, external analysis, and conclusion of the report. The primary sources and analytical tools in this report include PESTEL analysis, Apples website, Macrotrends, Bloomberg, Strategic Management 12e, and Porters Five Force Model.
2) The Company:
Apple Inc. was founded on April 1, 1976, by Steve Jobs, Steve Wozniak, and Ronald Wayne. Before it became a huge company, it first started as a small business in a garage at Steve Job’s home in Cupertino, California (Faizal, 2019). Three weeks after the company was founded, Ronald Wayne left Apple due to time and management. He sold his percentage of the company and they both moved on from each other (Faizal, 2019). The first technology that Apple sold was the Apple 1 computer in 1976, which was invented by Steve Wozniak. In 2007, Apple announced to the world that they made a new technology called the iPhone (Faizal, 2019). With the success of this smartphone, Apple began to develop more technologies such as the iPad and iPod. According to Statista, Apple’s headquarters are currently in California and they have over 132,000 employees working full-time. Apple’s mission is to bring the best user experience to its customers through its innovative hardware, software, and services. The companys vision statement is that they believe that Apple was made to make great products and that wont change (Rowland, 2019). Some of Apples core values include qualities, customs, standards, and principles.
The industry that Apple currently competes is the technology industry. This industry contains many famous companies including Google and Microsoft. The product-market that I have selected for this report is the smartphone industry. Apple offers many many phones including the iPhone X, iPhone XR, and iPhone 11. The companys phone price depends on the generation and amount of storage. Some of the firms main competitors include Samsung and Huawei. Market share represents the percentage of an industry, that is earned by a particular company over a specified time period (Hayes, 2019). It is calculated by taking the company’s sales over the period and dividing it by the total sales of the industry over the same period. As shown in Figure 1, Samsung had a higher market share percentage in 2018 than both Apple and Huawei. Apple dropped from 17.9% to 15.8%, which was the biggest decline from any of the smartphone companies in 2018. The other smartphone industry companies had a market share of 52.1% (Reisinger, 2019).
2.1) Assessment of the Current Strategy of the Firm for the Selected Industry:
Return on Stockholders Equity (ROE) measures the percentage of profit earned on common stockholders investment in the company. It is defined as the return on stockholders’ equity = net profit/stockholders equity (Hargrave, 2019). A higher ROE means that a company can generate profit without needing as much capital, which is another word for financial assessments. A low ROE means that the business is not generating as much profit (Hargrave, 2019). Apple had twice the amount of ROA than Samsung, from 2014 to 2018. The firm had a stronger strategy than its competitor because they were able to generate more profit without need as much capital. Samsung had poor ROE numbers, compared to Apple, as shown in Figure 2. They were generating less profit, which is not good for a company. Overall Apple had the better strategy than Samsung.
Return on Total Assets (ROA) measures the profit earned on the employment of assets. It is defined as the return on total assets = net profit/total assets. A higher ROA number means that the company is earning more money on fewer investments (McClure, 2019). A low number means that the company is not making enough money from its assets. As shown in Figure 2, Apple had a stronger strategy because they were able to earn more money on fewer investments due to higher ROA numbers. However, from 2017 to 2018, their ROA numbers started to plummet, but were able to pick it up in 2018. Unlike Apple, Samsung had some problems in their strategy. They didnt generate enough money due because due low ROA numbers than Apple in the last five years.
Price-Earning Ratio measures the amount investors are willing to pay per dollar of profit. It is defined as the price-earning ratio = market price per share/earnings per share. A higher p/e ratio means that investors are expecting higher growth in the future (Hayes, 2019). A low p/e ratio indicates that the companys stocks are undervalued. The current industry market average is around 20 to 25 earnings (Hayes, 2019). Apple and Samsung p/e ratio were almost exactly the same in 2014. However, as shown in Figure 3, both companies went in a completely different direction. At the end of 2015, Apple decided to change its strategy, but it started to decline in 2018. Unlike Apple, Samsung was able to get above the average in 2016, but the ratio decreased within the next two years. Overall, Apple had the better strategy because they had better price-earning ratio than Samsung for three out of the five years.
3) External Analysis:
3.1) The Macroenvironment:
PESTEL analysis has six main forces; demographic, global, technology, social, macroeconomic, political and legal. Changes in this forces within the macroenvironment can have a direct impact on any or all of the forces in the Porters model, thereby altering the relative strength of these forces as well as the attractiveness of an industry (Hill Jones Schilling, 2019). The following sections will give the reader a better understanding of these forces and how they will affect Apple within the next two to five years.
A) Technological Force:
Over the last few decades, the pace of technological change has accelerated. Technology can affect the height of barriers to entry and therefore reshape the industry structure (Hill Jones Schilling, 2019). Not only can technology grow, but also the mobile market. With the increase of the mobile market, we could see companies like Apple releasing new technology within the next two to five years. Apple has successfully been able to keep up with the new technology trends such as the Galaxy Fold and Mate X. They just recently released the iPhone 11 and Apple Watch 5 on September 20, 2019. However on the negative side, with the increase of smartphones, this could potentially lower the demands of other Apples products such as Macbook and iPads.
B) Demographic Force:
Demographic forces result from changes in the characteristics of a population including age, gender, and social class. As the population ages, opportunities for organizations such as Apple that carter for older generation are increasing (Hill Jones Schilling, 2019). Baby Boomers, did not have iPhones when they were little, compared to Generation Z. This gives the older generation a less advantage than the other generations. With the increase of the demographic force, Apple has a chance to not only target the younger audience, but also the Baby Boomers. Over the next two to five years, the firm could release another iPhone, specifically for the older generation.
C) Political and Legal Factors:
Political and legal forces are outcomes of changes in laws, regulations, and significantly affect managers and companies. One key factor when it comes to smartphones, is privacy. Smartphones today, can be easily hacked and stolen. Privacy is protected under many laws including the Fourth Amendment of the U.S. Constitution. Within the next two to five years, Apple could make improvements on their iPhones and technology, in order to protect peoples privacy. If laws are changing, the company might have to change its policies and regulations, in order to keep with the laws.
D) Global Forces:
Global forces have changed enormously in the last decade. Economic growth in Brazil, China, and India have created large companies and gives companies like Apple an opportunity to grow their profits faster. With the help of falling barriers, it has made it easier for companies to enter foreign nations (Hill Jones Schilling, 2019). Over the next two to five years, Apple could expand their markets to countries like Brazil or India. However, doing business globally, could both present opportunities and threats to Apple. Before the firm decided to expand its market, they must research and fully understand foreign laws and countries they want to do business with.
E) Macroeconomic Forces:
Macroeconomic forces affect the general health and well-being of a nation and the regional economy of an organization. The four primary macroeconomic forces are the growth rate of the economy, interest rate, currency exchange rates, and inflation rates. Interest rate can determine the demand for a companys products (Hill Jones Schilling, 2019). Lower interest rate can produce opportunities, while higher can produce threats. Economic growth, gives companies the opportunity to expand their operations and earn higher profits. Apples interest rate in September of 2018 was 2.8%. In the next two to five years, the firm should continue to have low interest rate and the economic growth should increase.
F) Social Forces:
Social forces refer to the way in which changing social mores and values affect as industry. Just like the other forces, it can create opportunities and threats. One major social movement of recent decades has been the trend toward health consciousness (Hill Jones Schilling, 2019). Health is one of the key essentials to a successful life. There is currently a health app on the iPhones, where you can check your steps, calories, and nutrition. The firm believes that health is important and they want their smartphone users to keep up-to-date with their health. Within the next two to five years, Apple could potentially update the health app and add new features to it.
3.2) Industry Analysis:
There are five forces to Porters Competitive Forces Model; risk of entry, rivalry among established companies, bargaining power of buyers, bargaining power of suppliers, and substitute products. As each of these forces grow stronger, it limits the ability of established companies to raise prices and earn greater profits (Hill Jones Schilling, 2019). Their strengths may change over time as the industry condition. Porters five force model will be used in the following sections to describe the features that make the intensity of the force strong or weak to Apple.
A) Risk of Entry:
Potential competitors are companies that are currently not competing in the industry, but have the potential to do so. Some of the potential competitors include the technology large companies like Microsoft and Google. As of right now, they dont have any smartphones, but they could make some in the near future. Brandy loyalty is when consumers have a preference for the product of established companies. Most consumers today would prefer smartphones from either Apple, Huawei, or Samsung. If the established company like Apple, has an absolute cost advantage, the threat of entry as a competitive force weakens. Another way to reduce the threat of entry is when companies achieve economies of scale, which is the reduction in unit cost attributed to a large output. Even though brand loyalty is moderate in the smartphone industry, the risk of entry is considered to be weak.
B) Rivalry Among Established Firms:
The smartphone industry is considered to be an oligopoly, which is a state of limited conditions. The prices are moderate because of the presence of the competition. Unlike monopoly, there is no dominant force in an oligopoly. The main companies in the smartphone industry includes Samsung, Apple, and Huawei. All three firms are always on top and they keep coming up with new ideas to increase their market. Popular apps like snapchat or instagram, can be found in all smartphones. It makes it easier for consumers to switch to other smartphone companies. Some factors that have major impacts on the intensity of rivalry include industry competitive structured, demand conditions, and cost conditions. The rivalry in the smartphone industry, very strong and it will continue for quite a while.
C) Bargaining Power of Suppliers:
The bargaining of suppliers refers to the ability of suppliers to raise input prices, or to raise the costs of industry. In 2018, Apple had over 1000 suppliers in their chain including Analog Devices and Glu Mobile. The largest supplier is Foxconn Technology Group, who are known for making Apples iPhones. They are the worlds largest contract maker for electronics and their headquarters are in Taiwan. Since the firm has a large number of suppliers, the bargaining power is considered to be weak. Even if Apple loses some supplier, it wont affect badly. The power might even get weaker in a few years, if Apple continues to grow and more suppliers join the chain.
D) Bargaining Power of Buyers:
The bargaining power of buyers refers to the ability of buyers to bargain down prices charged by companies in the industry, or to raise the costs of the companies in the industry by demanding better product quality and service. Since the smartphone industry is an oligopoly, they have a choice on which smartphones to buy. Buyers can buy from either Samsung, Apple, or from other smartphone companies. Powerful buyers are viewed as a threat to companies, especially when the switching lost are low and they purchase in large quantities. In the near future, we could see more smartphones companies evolve in the industry. With more companies, the more power the buyers get. Overall, the bargaining of powers is very strong in the smartphone industry.
E) Substitute Products:
Substitute products are products of different businesses or industries that can satisfy similar customer needs. For example, people can use a digital camera to take photos and call people on a regular home phone. With the iPhone, customers can do everything in one. It is more high tech and well advanced than the digital camera and home phone. Many people would rather use Apple because they want something that they know and trust. Even if the firm raises the price on their products, many people wouldnt switch to the substitute products. The threat of substitute products is considered to be weak and it will not change.
Exhibit 1: Porters Five Force Model:
Force Weak Medium Stronge Likely Change
Rivalry among established firms X Increase
Bargaining power of buyers X Increase
Bargaining power of suppliers X No change
Risk of entry X No change
Threat of substitutes X No change
4) Conclusion of the First Report:
In conclusion, Apple was founded in 1976 by Steve Jobs, Steve Wozniak, and Ronald Wayne. It first started as a small company in Steve Jobs garage and now it has over 132,000 employees working full-time. The industry in which Apple competes, it technology industry, but I chose the smartphone industry for this report. The firms current strategies is stronger than Samsung due to higher ROA and ROE. PESTEL analysis plays a huge role in Apple because it analyses the six forces and determines what will happen to the company in the next two to five years. Some of Porters model, were either weak or strong for Apple.
Apple PE Ratio 2006-2019: AAPL. (n.d.). Retrieved October 5, 2019, from M. (2018, November 6). Apple Inc. (AAPL): Analysis of Profitability Ratios. Retrieved October 5, 2019, from F., & University. (2019, July 21). The History Of Apple. Retrieved October 5, 2019, from / Valuation Snapshot ?Financial Information ? Investor Relations ? Samsung Global. (2018, May 23). Retrieved October 6, 2019, from C. W. L., Jones, G. R., & Schilling, M. A. (2019). Strategic management: an integrated approach: theory et cases. Boston, MA: Cengage Learning.
Hargrave, M. (2019, September 26). How Return on Equity Works. Retrieved October 5, 2019, from A. (2019, September 14). What the Price-to-Earnings Ratio P/E Ratio Tells Us. Retrieved October 5, 2019, from A. (2019, September 5). Everything You Need to Know About Market Share. Retrieved October 6, 2019, from B. (2019, August 6). How to Use ROA to Judge a Company’s Financial Performance. Retrieved October 5, 2019, from D. (2019, February 21). Apple iPhone Sales Tanked at the End of 2018. Retrieved October 6, 2019, from C. (2019, February 13). Apple Inc.’s Mission Statement and Vision Statement (An Analysis). Retrieved October 5, 2019, from