Apple Watch Analysis: Porter’s Five Forces Model

Introduction

Apple Watch is Apple’s first wearable device that was launched in 2015. Its development and entrance to the market of wearables include both advantages and drawbacks. By analysing the industry of wearables, it is possible to understand the trends that were related to the entrance of the identified product (Johnson, Scholes, and Whittington, 2011). The model of Five Competitive Forces that was suggested by Michael Porter is a relevant tool to explore the case study. Moreover, Porter’s Generic Strategies framework will be used in this paper to determine an appropriate positioning strategy for Apple Watch to make it more competitive.

Five Forces Analysis

The evidence shows numerous examples proving that competition drives progress (Dehghani, 2018; Shokeen, 2016). The industries that contain various strong companies are likely to focus more on research and development, achieving higher results and providing innovative products (Nwosu et al., 2018; Palmer, 2020). The industry of wearables includes such rivals as Apple, Samsung, Fitbit, Huawei, and others. To better understand the effectiveness of Apple Watch, it is important to consider the whole industry and pay attention to the existing competitors. Porter stresses that the environment largely determines the competitiveness of a company (Shokeen, 2016). The basic conditions and the performance of companies within the industry are the key issues to analyse. Islami, Mustafa and Latkovikj (2020) point that Porter’s five forces model makes it possible to assess the competitive environment by five forces of competition, which are presented in the form of certain groups that affect the position of an enterprise. Thus, an assessment is made on the role of five forces and how they affected Apple Watch’s entrance to the market.

Competitive Rivalry

The rivalry between competitors implies the presence of organisations that offer similar services and products. As stated by Johnson, Scholes and Whittington (2009), the degree of competition increases when there are high fixed costs, a low level of differentiation, equal size of companies, and a mature market. Apple Watch was designed to free people from their smartphones and make them happier (Babu, Qumer, and Purkayastha, 2017). Before launching this product, Apple systematically consulted with the leading specialists in horology and innovative technologies.

The degree of competition in the wearables market can be assessed as high. After the first year of its launch, Apple Watch took 61% of the market, but this number reduced to 52% and 49% in the second and third years respectively (Babu, Qumer, and Purkayastha, 2017). Accordingly, Apple overtook its competitors, whose market share was similar; for example, Fitbit had about 13.2% of the market share. In 2017, the global market share took by Apple (15.9%) was almost similar to that of Xiaomi (15.5%) (Babu, Qumer, and Purkayastha, 2017). While the effective entrance of Apple Watch cannot be contended, it is clear that the initial success tends to decline. This is likely to result in lower sales and customer satisfaction, leading to more opportunities for rivals.

Bargaining Power of Buyers

A strong brand image and customers’ loyalty to Apple’s products influenced their bargaining power. In this case, sales can hardly be an indicator of the quality of the device (at that time, no one could test the Apple Watch). The evidence from the case study shows that the first Apple Watch was priced at $349 that is much higher compared to Motorola’s $150 and Pebble’s $75 (Babu, Qumer, and Purkayastha, 2017). Considering that customers are offered a wide variety of devices, they can easily switch from a product to product. The bargaining power of buyers is also supported by various editions, which help them to identify the best option based on design and price preferences (Hong, Lin, and Hsieh, 2017; Choi and Kim, 2016; Zhao et al., 2016). Thus, the entry of Apple Watch seems to strengthen the bargaining power of customers by improving competition and choice options.

The sales of smartwatches constantly increase, and their capabilities are growing. With the increasing number of adherents of a healthy and active lifestyle, they are becoming a commodity in mass demand (Babu, Qumer, and Purkayastha, 2017). In addition to tracking basic indicators, watches are an important accessory for a daily look. The expansion of the range with models from famous fashion brands seems to be a logical development of the category. Technological accessories favourably complement one’s image and help to take care of one’s health.

Bargaining Power of Suppliers

Supplier power means the extent of control a supplier hold regarding its consumers, which depends on a range of factors, including the number of suppliers and the market trends (Bashir and Verma, 2017; Isabelle et al., 2020). This threat clarifies the pressure from suppliers that can raise prices and force enterprises to diminish the number of products supplied, which can negatively influence profits (Islami, Mustafa and Latkovikj, 2020). In case of Apple, the bargaining power of suppliers is low as the company successfully mitigates this threat by designing state-of-the-art devices. Along with iPad and iPhone, Apple Watch includes an operating system and technologies that are all created in-house. The problems may only occur in the process of cooperating with third party suppliers that provide minor details and raw materials.

Speaking of the market of wearables, it is possible to note that the bargaining power of suppliers is moderate. Statistics show that many of the key smartwatch manufacturers continue to be on the right track (Babu, Qumer, and Purkayastha, 2017). The integration of new functions into the supplied products helps to maintain the popularity of smart watches among buyers. The case study shows that companies struggle to constantly develop to meet the needs of customers as the demand for smartwatches remains high (Babu, Qumer, and Purkayastha, 2017). To this point, smartwatches are considered to be underdeveloped since they just replace some functions of smartphones.

Threat of Substitutes

This threat refers to different forms of a product and other items that can be used as a substitution (Nurlansa and Jati, 2016; Semuel, Siagian, and Octavia, 2017). Smartphones are the key alternatives to using Apple Watch since they have similar functions. The industry of smartwatches involves such giants as Samsung, Huawei, Xiaomi, and others, which design their products. In comparison to them, Apple’s technologies seem to outweigh in regards to design and functionality (Babu, Qumer, and Purkayastha, 2017). The cost of changing these products is high and time-consuming, and it makes the threat of substitutes moderate.

While some experts note that the company achieved this mission, others consider that this device was a flop. Compared to the alternatives, Apple Watch has more functions and versions, including cheaper editions and luxury watches (Babu, Qumer, and Purkayastha, 2017). This differentiation allows for targeting various customer groups and meeting their needs (Nwosu et al., 2018). For example, Fitbit produces only standard devices that track a person’s health and make notifications. Apple Watch cooperates with such brands as Hermes to create new options that are primarily perceived as fashion accessories. Also, there is a partnership with Nike to advance Apple Watch for people engaged in sports, who need more details about their health.

Threat of New Entrants

A smartwatch theme is trending now as companies are constantly announcing new models. The threat of new entrants to the wearables market can be identified as low. According to Porter, this threat means the extent to which new entrants can pose risks to the existing companies (Islami, Mustafa and Latkovikj, 2020). From the case study, it becomes clear that Apple Watch can be described as the quintessence of the whole philosophy of Apple. It is not so much a technical device as an object of desire that affects a customer’s emotions and gives a pleasant experience. The main question to answer is does the watch have any unique functional purpose. Has Apple been able to find a way to use Apple Watch that is different from anything people have seen before? Since Apple’s brand loyalty is high, other brand names are well-known, and high initial capital is necessary, the threat of new entrants is low.

The success of Apple Watch is evident even though some critics argue that it did not achieve in its mission to free people from their smartphones. It is possible to expect that other companies would follow Apple’s footsteps in developing and presenting their devices. However, anticipating such intentions, Apple refuses to share its sales from Apple Watch and includes it in the category of other products. This protective measure seems to limit the entrance of new companies into the mentioned market (Prasad and Warrier, 2016). Moreover, the entrance requires significant investment and contains risks related to the failure and a lack of customer interest. Therefore, the threat of new entrants is low, and Apple should pay attention to its current competitors.

Strong and Weak Aspects of Wearables Industry

The industry of wearables is attractive by its great potential to develop in the future. One of the key promising areas is to design such a gadget that would stand alone from smartphones and replace traditional watches. This is the strongest aspect of the industry, and the new features may include improved functionality, high-accuracy GPS, more compelling apps, and so on. Another important aspect is related to the growing demand for technologic advancements that can make the lives of people easier and happier. A great variety of editions and formats of smartwatches is also a pleasant opportunity for Apple and its competitors.

However, the weak sides of the wearables industry are its current insufficiency in differentiation. Even though Apple decreased its Apple Watch price, it is still not affordable for many customers. The functionality of the existing editions is also weaker than it was expected. Along with Apple, its rivals fail to launch a product that would transform the experience of users (Babu, Qumer, and Purkayastha, 2017). A short battery life reduces the comfort of wearing smartwatches. Nevertheless, the identified weak points serve as the areas for potential improvement as they clarify the unmet needs of buyers.

Porter’s Generic Strategies

To plan how a company will compete in the market, it is critical to identify the strategies that will be used to achieve its mission. As stated by Porter, there are four generic strategies, such as cost leadership, cost focus, differentiation focus, and differentiation (Nurlansa and Jati, 2016; Rothaermel, 2016). The selection of the strategy depends on the scope of the target market, cost of products, and the resources of a company (Zehir, Can, and Karaboga, 2015). To gain a competitive advantage in costs and narrow markets, Porter recommends using a strategy of cost focus, while differentiation focus is beneficial for product competition advantage (Nickols, 2016). Cost leadership can be considered for broad markets and potential competitive advantage in costs.

The revolution of iPhone and iPad was that these devices created completely new formats for consuming content and interacting with information. For example, the advantages of these products are various features like multitouch, gesture paging, and so on. Apple Watch demonstrates that Apple has not forgotten how to come up with such details without Jobs. However, customers cannot mention a new format of interaction with the device or fundamentally new opportunities for use in everyday life in Apple Watch. For this product, it seems to be relevant to choose the differentiation strategy to obtain a competitive advantage through the provision of unique products that are not offered by rivals. It is possible to launch absolutely unique products having no analogues on the market or some unique characteristics of goods and services (Dehghani, 2018; Kabeyi, 2018). For instance, a user-friendly interface, the highest quality, customer-oriented service, and other issues can be noted.

The essence of this strategy can also be demonstrated using the value chain model. The first value chain is market averaged that consists of the averaged activity costs and the typical profit. The second value chain is characteristic of a company implementing a differentiation strategy (Zehir, Can, and Karaboga, 2015). Apple has increased the costs of certain activities to obtain the product with unique characteristics. Due to this uniqueness, the company can afford to charge a premium markup by setting the price for Apple Watch above the average of the market.

Both uniqueness and difference of the product features protect it from high competitive rivalry, as well as the pressure from substitutes. At the same time, brand loyalty limits price sensitivity as many customers are not only interested in Apple Watch’s functions but also its image. The key benefit of the differentiated strategy is that it allows for selling a product at a higher price than the market average, fostering competition and limiting the adverse influence of market leaders on the company’s sales. This strategy helps in achieving high brand loyalty if the company’s product has essential advantages that are implemented in a variety of editions (Zehir, Can, and Karaboga, 2015). For Apple, sales growth will be driven by lower prices for earlier versions of Apple Watch and the release of new models from competing vendors.

To create mobility barriers for sustaining the strategy of differentiation, Apple can be recommended to invest in the research and development area to constantly come with improvements (Cavaleri and Shabana, 2018). Sustainability can also be achieved by the necessary protective measures to ensure the safety of the company in the market. At the same time, Porter’s idea is not that in market conditions, all around are potential enemies, but that the business community is interdependent, and economic relations presuppose the interaction of business entities (Zhao et al., 2017). The relationships across the industry form this interaction that depends not only on the result of their activities, but also on the general situation in the economy. The positive rivalry is aimed at creation, while negative and aggressive competition leads to destruction.

The choice of the differentiation strategy can be justified by the size and focus of Apple, namely, Apple Watch. This strategy is applied in saturated markets by companies with the ability of investing heavily to establish customer awareness of the unique features of their product (Morden, 2016). While employing a differentiation strategy, the company does not count on a low cost of products as it is most likely greater compared to the market average. Instead, Apple should count on the possibility of setting a higher price for the product, which is for a high quality and technologic excellence.

Reflection on Applying Porter’s Frameworks

In practice, there are several disadvantages or risks of using a differentiation strategy. Schilling and Shankar (2019) state that a noteworthy difference in prices is likely, but it can be inappropriate for target customers even with the unique properties of the product. Also, missing product uniqueness because of rapid copying of specific features with inexpensive substitutes can reduce the number of loyal customers (Schilling and Shankar, 2019). Apple should remember that the majority of its customers value a high quality and functionality of its products. In case the rivals would offer similar high-quality smartwatches, the company can lose some buyers (Schilling and Shankar, 2019). Therefore, Apple Watch should be improved constantly by presenting new editions, partnerships with other brands, and any other cooperation with local and global organisations.

Another drawback of Porter’s model is that care must be taken when using this model. The significance of the organisation’s present competitive advantage should be given sufficient attention. The mentioned model was designed to analyse separate business strategies (Omsa, Abdullah, and Jamali, 2017). It does not work with the synergies, partnerships, and other forms of cooperation within a giant company. In the above cases, the use of Porter’s model can lead to improper conclusions. According to a theoretical perspective, this model is considered to be too analytical and predisposed to subjective results (Nickols, 2016). Sometimes, opportunities should be used to generate new markets and products as opposed to opting for existing ones. However, it seems that the objectivity of a researcher and a focus on a wide range of facts in combination with scholarly literature can make the analysis more objective and less biased.

A price leadership strategy can be used as an alternative when there is an economy of scale or the opportunity to reduce costs for a long period. As a rule, the companies that apply a differentiation approach to create distinct product characteristics and cannot compete in the market at the product level and choose it (Salavou, 2015). Morden (2016) stresses that the presence price-sensitive customers makes the strategy effective. The cost leadership strategy may imply changes in the product and a shift regarding the standardization and simplification to support its production and escalate output. In addition, it may necessitate a high portion of the primary investment in research and technology to minimise costs, as noted by Salavou (2015). This strategy requires close supervision of a product design, work procedures, as well as a flawless organisational structure.

The limitations of this paper are associated with the number of sources used. The analysis is based on the case study and a range of scholarly articles and books to support the arguments. Although different sources were involved in considering the case of Apple Watch entry to the market from various perspectives, the paper cannot fully address the future of this product. Some recommendations are presented, but further research is required to better understand the ways of improvement for the smartwatch industry.

Conclusion

To conclude, with the advent of new technologies, one can observe a pronounced segmentation of the market. Smartwatches help in monitoring health, tracking daily activity and sleep, and can also act as a stylish addition to one’s everyday look. This analysis found that the entrance of Apple Watch to the market was effective mainly due to the high expectations of its consumers. The functionality of this device should be advanced to meet the needs of buyers.

The main element of Apple’s external environment is the industry in which it performs. The analysis of the industry shows that it largely identifies the low level of new entrants and bargaining power of suppliers and great impact of competition, the bargaining power of buyers, and the threat of substitutes. Among the acceptable options for competitive strategies, the differentiation strategy was chosen as the most relevant one. Since external factors tend to affect all companies in the industry at the same time, their analysis allowed for determining that the market of wearables is a promising area for further development.

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