Porter's Five Forces with a Side of Christensen

I think the best way to learn a business theory is to repeatedly apply it to real-world companies. So below is a short analysis of Apple based on Michael Porter's Five Forces theory and Clayton Christensen's disruption theory. See Concepts page for discussion of Clayton Christensen and Michael Porter and list of sources. Porter's Five Forces are in boldface.

1.        Decrease Rivalry/Competition: Look for opportunities to make products more affordable, but don't compete primarily on price. Avoid price-based competition by staying away from low end markets where price is the main differentiator. Compete based primarily on quality and service and a unique ecosystem. Stick with a hardware-based profit model, since it distinguishes Apple from Amazon and Google's profit model approach, and leads to less rivalry with these two companies. 

New, innovative products flowing from Apple's unique, integrated approach reduce rivalry/competition.

2.        Decrease Supplier Power: Move up and down the value chain and co-opt critical, adjacent supply components. Reduce the power of distributors by taking over retail distribution and product service. Reduce the power of chip makers by designing own chips and letting a pure fabrication outfit make them (like Taiwan Semiconductor). Reduce the power of memory and glass suppliers by entering into long term contracts and partnerships when possible, buying up large chunks of supply (e.g., like sapphire deal with GT Advanced). Reduce the power of manufacturers like Foxconn by buying the manufacturing equipment and only allowing the equipment to be used for Apple products. Use multiple suppliers when possible.

3.        Decrease Buyer Power: Offer a unique, well-differentiated product/service/ecosystem. Keep critical product features/services proprietary so products/services are sticky: contacts, calendar, Pages, Numbers, iCloud, Reminders, iPhoto, iMovie, iOS and OS, etc. Increase product stickiness by offering valuable new proprietary Apple services. Iterations and quality of iOS and OS are critical, since almost everyone else is using Android -- iOS and OS are critical differentiators (which is probably why it makes sense for Jony Ive to be more involved here). Carefully broaden range of devices sold to further decrease buyer power.

New, innovative products flowing from Apple's unique, integrated approach reduce buyer power.

4.        Decrease Threat of New Entrants: Discourage new entrants by avoiding huge margins and making products simpler and more affordable when possible. Avoid overserving through simple, intuitive, and useful product designs that squarely address a job that needs done. Only make meaningful, useful product improvements. Apple's vertical integration should help it avoid overserving by facilitating the creation of simpler, more affordable products that deter new entrants. See post titled "How Outsourcing Can Destroy a Company."

Make sure competitors can't match Apple's product quality with a lower cost structure -- i.e., if someone beats Apple's price, it's because (1) product quality is inferior or (2) the competitor is accepting a smaller gross margin, not because the competitor has a lower cost structure that Apple can't match. This is why Tim Cook's supply chain expertise is so critical to Apple's future success: it's a great defense against low end disruption from new entrants, because new entrants will have difficulty matching or beating the supply chain cost structure that Cook has architected.

5.        Decrease Threat of Substitutes: Selectively make products which might ultimately replace the MacBook or the iPhone -- e.g., wearables and simpler, cheaper versions of the MacBook. Apple needs to be able to compete with potential substitutes like Chromebooks.

The author owns stock shares of Apple.