EXTERNAL AND INTERNAL ENVIRONMENTS essay

The development of business strategy requires making a thorough analysis of internal and external environments. In this context, it is important to consider the segments of the general environment, the forces of competition and the company’s position in relation to these competitive forces, to assess external opportunities and threats, to weigh internal strengths and weaknesses of the company and to develop a strategy basing on the results of the analysis. Furthermore, it is important to identify the capabilities and resources of the company, to determine its core competencies and to analyze the company’s value chain as well as its alignment with the above mentioned resources and capabilities.

The industry chosen for this analysis is information technology, and the company chosen for analysis is Apple, Inc. It is a multinational corporation which is the leader in manufacturing and selling consumer electronics, computers, software and online services. Apple is the second largest company in the IT industry by revenue (Yahoo Finance, 2014). In 2013, Apple’s brand was recognized as the most valuable brand in the world (Yahoo Finance, 2014). The purpose of this paper is to analyze external and internal environment of Apple, Inc. and to generate recommendations pertaining to the company’s future strategy.

1. Segments of the general environment

The general environment in which the company is operating is shaped by different dimensions of the society. There are seven key segments of the general environment: demographic, economic, political/legal, socio-cultural, technological, global and physical (Parth, 2003). The general environment can hardly be influenced by businesses, but it does have a powerful impact on industries and companies operating in them.

For Apple, two segments of the general environment that have the largest impact on the company’s strategy and operations are technological and socio-cultural segments. The socio-cultural segment encompasses values and attitudes common in a society (Parth, 2003). The whole process of IT industry development is largely influenced by social values and interests such as the interest to entertainment and the interest to communications.

Apple’s market leadership is based on the interest of the general public to technology and to telecommunications, to the growing popularity of smartphones, tablets and other portable devices and on the growing dominance of Internet as the means of communication. Apple manages to drive and shape customer interest to their products; the company’s market success depends on the ability to track customer values and needs and to offer the products that fulfill these needs. Furthermore, Apple’s brand management is based on esthetic values (Apple’s products are positioned as exceptionally designed) and on the willingness to stand out of the crowd (Apple’s products are largely positioned as elite products).

Naturally, technological segment of the general environment has the largest impact on IT sphere and on Apple’s business. This segment pertains to the institutions and activities associated with technology, new discoveries, innovations and technological change in general (Parth, 2003). IT industry actually emerged due to the advancement of technological segment, and continues to expand rapidly due to the creation of new technologies. Currently rapid technological development and replacement of technologies are both driving Apple’s growth and intensifying competition in the industry. Advanced technologies of creating software and hardware, the growth of cloud services, emergence of new wireless technologies – all these changes are used by Apple to develop and market new products.

2. Forces of competition

The second component of external environment that should be analyzed is industry environment and competition in the industry. This environment can be assessed using the model of five forces of competition. These forces include: threat of new entrants, threat of substitute products, bargaining power of suppliers, bargaining power of buyers and rivalry among competing firms. With regard to information technology industry and Apple Inc., the most important forces are bargaining power of suppliers and rivalry among competing firms.

Apple successfully managed to overcome other competitors using innovations and effective brand management. The company chose to position its brands as exceptional products and outperformed competition in terms of product design and performance, and introduced novel features which were missing in competing products. In fact, the ability of Apple to distinguish itself among competitors is one of its key competencies.

As for the power of suppliers, Apple’s successes were ambiguous. On one hand, Apple is a valuable partner and the suppliers are likely to compete for being Apple’s vendors. On the other hand, the key supplier of Apple is Samsung which is also Apple’s key competitor. Samsung is the key supplier of high-quality screens and other novel components. While Apple is developing the relationships with other suppliers and looking for replacements of Samsung’s products, the dependency on these supplies was not efficiently managed by Apple in the past.

3. Ways of improving forces of competition

Two key forces of competition important for Apple, Inc. are bargaining power of suppliers and competitive rivalry. In the future, Apple should first of all address the bargaining power of suppliers in general and the dependence on Samsung’s supplies in particular. Apple is already negotiating with LG to supply screens. The company also stopped purchasing iPhone screens from Samsung and reduced purchases of iPad screens (Yahoo Finance, 2014). The number of flash memory chips purchased from Samsung also reduced. However, Apple still depends on Samsung to supply microprocessors and memory components, as well as other supplies (Yahoo Finance, 2014).

The choice of high-quality components for Apple is limited, and it should be noted that LG is also Apple’s competitor in terms of smartphones and tablets. Therefore, Apple should develop additional ways of solving the problem other than simply switching between suppliers. It might be recommended for Apple to organize own production centers in Asia to produce critically important components. Such step would allow Apple to reduce the power of suppliers and would help to maintain rigorous quality standards for hardware components.

Competitive rivalry in IT sphere is intensifying as more hardware leaders start manufacturing their smartphones, laptops, players, tablets, etc. Apple can address this force of competition by further driving innovation and differentiating their products. Apple is perceived as high-quality brand offering cutting-edge technology at premium price (Yahoo Finance, 2014). Therefore, it would be beneficial for Apple to add new features into their products, introduce new versions of their products and foster innovation in order to retain industry leadership.

4. External threats and opportunities

There exist various external threats influencing Apple, Inc. The major threats are:

• rapid technological development and change (the company might be set aside by a competitor who invents a novel technology)
• tax increases (Apple’s profits were driven down due to tax increase which took place in the United States in 2013)
• patent breaches (competitors might imitate Apple’s patents or apply reverse engineering to Apple’s novel features and make profit on these features)
• appreciation of the dollar (Apple’s profits in foreign countries are reduced due to strengthening dollar)
• growing popularity of Android (widespread use of this operating system make Apple infrastructure less attractive for customers)
• increasing labor costs in Asia (the protests of workers in Asia, especially Foxconn workers, lead to the increase of Apple’s costs and drive profits down)
• price pressure performed by Samsung (Samsung is gradually increasing the prices of key components).

There also exist various opportunities available for Apple. The list of key opportunities includes:

• growth of demand for tablets and smartphones, along with market expansion (worldwide demand for smartphones, tablets and other portable devices is increasing, and Apple’s revenues are likely to grow)
• internal innovation (Apple can develop new hardware technologies and advanced software, using its R&D capability)
• innovation through acquisitions (Apple can acquire promising technologies, patents or startups and integrate them into Apple’s ecosystem)
• patent protection of new technologies (the company can protect its novel features by patents and secure itself against potential cloning of new devices performed by competitors)
• launch of iTV (iTV is expected to enrich Apple’s ecosystem and to provide advanced experience for TV watchers; this product is already long-awaited)
• mobile advertising (the market of mobile advertising is growing, and Apple can drive revenues by popularizing its iAd platform for advertising)
• increasing demand for cloud services (the popularity of cloud services makes it possible for Apple to popularize its iCloud system).

The most serious threat for Apple is rapid technological development and change. If strong competitors like Samsung invent new technologies and market them, Apple’s market position might be significantly affected. In order to keep market leadership, Apple should introduce new products and develop or acquire new technologies. Therefore, Apple should pursue own innovations; the company should also keep track of recent advancements and acquire promising technologies.

The most attractive opportunity for Apple is currently the launch of iTV. Although Apple offers TV services, the overall TV infrastructure lacks sophistication and alignment with overall Apple ecosystem. The audience of TV is huge and the launch of new interactive TV device compatible with other Apple devices will increase the company’s profits and popularity.

5. Internal strengths and weaknesses

In order to identify Apple’s perspectives and strategies, it is necessary to consider internal factors (strengths and weaknesses). Apple has lots of strengths, the major of them being:

• impressive brand reputation (Apple managed to position the brand as premium products for elite people)
• high customer loyalty and appreciation (the customers are loyal and tend to stay in Apple’s ecosystem)
• self-reinforcing ecosystem (Apple has a diverse ecosystem which integrates various hardware and software products into one large interactive space)
• status of top innovator (Apple is perceived as the leading innovator and its products are highly anticipated)
• very strong financial performance (high profit margins and very high liquidity)
• network of retail stores (high-quality customer service helps to create advanced user experience; new products are distributed through the network)
• powerful marketing strategy (Apple’s team masterly uses various marketing techniques to create a hype for their products and to strengthen the brand)

At the same time, Apple also has a number of weaknesses:

• high prices (Apple’s products are sold at premium prices which are significantly higher compared to competitors’ prices)
• closure of Apple ecosystem (Apple software and hardware are not compatible with other platforms, so users might refuse from using Apple products in order to be able to work with their favorite software)
• decreasing market share (although Apple is the market leader, its market share is slightly declining, primarily due to competition)
• changes in senior management (Apple now has to operate without the guidance of Steve Jobs; in addition, two senior managers responsible for retail left the company)
• new product defects (some new products of Apple might have flaws or faults; these issues damage brand reputation and sales)
• dependence of Apple supply chain on the key competitor (as it was mentioned above, Samsung is the key competitor of Apple, and it is also its major supplier)
• decline of gross margin (Apple’s gross margin demonstrates a decline over time).

6. Available strategies

For strategic purposes, it is important to consider how Apple can take advantage of its key strengths and how it can address its most significant weaknesses. First of all, Apple can combine such strengths as the status of top innovator and its self-reinforcing ecosystem to attract more customers and keep them attached to the ecosystem: the expansion of Apple into other niches, such as television (iTV) and smart gadgets (iWatch) allows to gain the attention of new customers, and once they purchase Apple products, they will be able to feel the value of Apple’s ecosystem. Using such strategy, Apple can also address such weaknesses as declining market share and declining gross margin.

Furthermore, Apple can develop new software products and online services to enhance customer loyalty and appreciation and to integrate current customers further into the ecosystem. In addition, Apple should consider addressing such weakness as high prices. On one hand, premium prices are part of Apple’s brand image and lowering these prices might affect both profits and brand value. On the other hand, high prices might prevent customers from purchasing Apple products. It is recommended for Apple to adjust its marketing strategy and to offer two ways of receiving products at discounted price: loyalty programs for existing clients and various contests and drawings for new clients. In this way, Apple will further fuel the interest to its products and reward existing customers for their loyalty. Using this strategy, Apple would be able to address such weaknesses as high prices and declining market share.

7. Resources, capabilities and core competencies

Strategic analysis should take into account the company’s competitive advantage. In order to assess competitive advantages, it is necessary to explore organizational resources, capabilities and core competencies. Resources can be classified into tangible (quantifiable and observable assets) and intangible (assets that cannot be observed physically, are rooted in the company’s history, are difficult for competitors to imitate and accumulate in the course of time) (Hitt, Ireland & Hoskisson, 2014). Capabilities are defined as special methods of organizing resources in order to create customer value, and core competencies are determined as capabilities which are the source of competitive advantage (Hitt, Ireland & Hoskisson, 2014).

Apple’s key resources are:

• financial resources (high profit margin, large deposits of cash, large market share)
• technological resources (manufacturing centers, outsourcing agreements)
• R&D resources (research laboratories, ownership of advanced technologies)
• human resources (highly skilled employees)
• marketing resources (network of retail stores, partnerships with other companies, marketing power of Apple ecosystem)
• goodwill (impressive brand reputation, many loyal customers)

Distinct capabilities of Apple are shaped by successful combinations of Apple’s key resources and include:

• R&D capability (achieved due to effective use of R&D resources, technological resources and human resources)
• marketing capability (formed as a combination of goodwill, marketing resources, financial and human resources)
• customer service capability (developed as a combination of human resources and financial resources)

All of these capabilities are Apple’s core competencies: R&D potential, superior customer service and impressive marketing. Indeed, these capabilities are rare, create value for Apple’s customers, cannot be substituted as Apple’s development actually relies on these core competencies and are both difficult and costly to imitate (Hitt, Ireland & Hoskisson, 2014).

8. Apple’s value chain

Value chain activities are the activities aimed at creating customer value. Key activities involved in the value chain include inbound and outbound logistics, operations, marketing and service (Solomon, Marshall & Stuart, 2010).

At the first level of general administration, Apple creates value through effective strategic management and uses its strong financial performance to enhance further growth and development. At the level of HRM, Apple selects the most talented employees and rewards them for their achievements to form a superior workforce. At level 3 which is associated with technological development, Apple creates innovations in its research labs, acquires external innovations, protects its technologies using patents and licenses and extends its manufacturing capabilities. At the procurement level, Apple establishes relationships with suppliers and optimizes its supply chain (Solomon, Marshall & Stuart, 2010).

The level of inbound logistics encompasses internal supply systems, receiving systems, methods of acquisition (Solomon, Marshall & Stuart, 2010). The level of operations pertains to developing and manufacturing new devices, performing consumer research, etc (Solomon, Marshall & Stuart, 2010). Outbound logistics includes the network of retail stores, relationships with other distributors, retailers, transportation companies, etc (Solomon, Marshall & Stuart, 2010). At the level of marketing and sales, Apple uses the power of its skilled workforce to impress the customers with new advertising campaigns and positions its devices in a proper way. Finally, at the service level Apple provides high-quality customer service which adds even more value to Apple’s products.

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