Apple Challenges and Pricing Strategy

Q1: What are the key challenges Apple is facing, both in terms of the macro-environment and industry competition?

Although Apple Inc. now is one of the successful companies in the world, the company is exposed to many problems. Using PEST Analysis, these problems are potential factors that Apple Inc. face including political, economic, social, and technological aspects. In the aspect of policy, Apple Inc. had a robust experience for these years. The headquarter of Apple Inc is now in the U.S., but Apple is still facing “legal stress domestically also” since Apple imported some material to manufacture its phone’s parts whichever earlier banned by the U.S. government (Mohammad, Usman & Md, 2015). In addition, America’s labor and environmental laws make it hard for Apple Inc. to compete in the market, according to the 10-K form of Apple Inc. (2013).

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Because Apple Inc. is now cooperating with a great many of contract suppliers worldwide, Apple faced several supplier worker issues and even some suicides cases, for instance, in May 2010, long working hours brings stress to workers and “two of workers lost their life and sixteen were injured during an explosive in one of Apple’s supplier facility” (Mohammad, Usman & Md, 2015). As a result, some political rules in some countries restrict how Apple Inc. conduct business in that specific country. Besides, if Apple is competing with local counterpart, let’s say Huawei, a Chinese mobile manufacturer in China, Huawei can get a pass to expand in China while Apple might face several restrictions as Chinese government would support local companies. Lastly, unstable U.S. trade relationship conducted by the U.S. government may result in “potential retaliation against Apple in China” (Financial Times, 2018).

Although with the promotion of iPhone X, Apple Inc. now experience a relatively high profit, it still faces economic challenges. The world’s economy was slow in the past few years, and Apple Inc. has been affected by such a crisis. According to the 10-K form of Apple Inc (2013), the sale in the American region was 9% percent in 2012-2013 while the number was 50% of 2011-2012. In China, the sale number in 2011-2012 was 78%, but in the year 2012-2013, the number decreased to only 13%. Moreover, factors such as unemployment rate contribute to the sale dilemma for Apple Inc in countries such as China, even though Mr. Cook insisted that “China and its growing middle class still held great potential for the iPhone” (Financial Times, 2018). What is more, U.S. fiscal problems as well as stringing dollars would put the giant companies such as Apple Inc. in a tough place as the cost and the price are now a problem to settle.

In the aspect of social analysis, Apple Inc. has made many changes in its product and enterprise’s pattern to satisfy its consumers world-widely. Apple Inc. is subject to social effect since some of the external sociocultural factors are applied to its macro-environment; both rising use of mobile access and rising use of social media led to the electronic devices such as iPhones and iPads being widely accepted by the society. It is indeed a great chance for Apple Inc to expand its market; however, Apple is struggling in more-conscious markets in countries such as China and Indian. Taking China as an example, Apple Inc. suffers from industry competition as Chinese rivals such as Huawei and Xiaomi “improving their hardware while keeping prices low” (Financial Times, 2018). As a result, many domestic potential buyers in China would purchase Huawei or Xiaomi instead of Apple’s product because domestic manufacturers are familiar with Chinese customers’ buying behavior: seeking for sound quality with a lower price.  

Innovations are defined as the key Apple Inc. lays its eyes on technology. It always has an aggressive philosophy on innovation. By offering its unique and advanced technology, it “retained 49% of its customers and converted 20% to IOS in the year 2012-2013” (Mohammad, Usman & Md, 2015). However, with the rise of rivals such as Huawei, Apple Inc. has to consider its technology strategy it once being pride about. Android system is applied in Huawei’s product, and now many people believe that the Android system is easier to use compared to Apple’s IOS. Besides, Apple is supposed to invest more in R&D as of competitive and short product life cycle nature of the industry, according to Apple 10- K form (2013). What is more, Apple is using its floor software application offering “which is third-party software, bringing risk to its continuation of the contract with the Apple” (Mohammad, Usman & Md, 2015). As a result, Apple’s technological challenges come from its inner system and technical innovation and the industrial competition from its rivals.

Q2: Discuss Apple’s pricing strategy according to Porter’s generic strategies. What are the strengths and weakness of Apple’s pricing strategy? What are your suggestions to overcome the shortcomings? Justify your answer.

According to Porter’s Generic Strategy (1980), one strategy is known as differentiation. The definition of the differentiation is to differentiate a business from others that focus on new and unique products with value are created for which buyers or consumers would like to pay premium prices for. Apple Inc has applied this strategy since it was first founded and tried to retain its competitive advantage in the smartphone and computer electronics industry. The most important factor for Apple Inc. to expand its market is to make its product different from those of the competing brands. Apple is the manufacturer of iPhone, Mac, iPod, and so on. These are all premium product, and hence, Apple Inc. sells them at premium prices (Pratap, 2017). Unlike its major competitors such as Huawei, Apple always aims to set it apart from its competitors not by price but by its products’ feature such as its IOS system. What is more, Apple Inc. limits the innovation of new product generation since iPhone 4 generation; instead, Apple Inc. focuses on only a few sparkling innovations and applying already-existing product design. Such behavior helps the company to focus on only a few highly differentiated innovations which results in “brilliant marketing wonders while controlling the resources, costs and maintaining stability” (Pratap, 2017).

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    Apple’s pricing strategy is also related to differentiation that sets its price apart from its competitors. While many smartphone manufacturers are trying to retain the price, Apple made a bet that iPhone X would be accepted even though the price was set to up to $ 1,000, which is a vast forward in smartphone technology (Financial Times, 2018). The new iPhone XS Max, for example, is $100 higher than the X, which is to be a total of $1,099 for a model with only 64GB memory. However, most Apple fans would not be satisfied with such storage, which “raises the price to as much as $1,449 for 512GB” (Financial Times, 2018). Apple Inc. also provides other services that one customer can add theft and loss insurance for $299, which results in the high-end iPhone can “easily max out about $1,800” (Financial Times, 2018). The price strategy allows Apple Inc. to extract more revenue from each customer, and Apple has dominated the high-end smartphone market that it “accounted for 86 percent of smartphones costing more than $751 last year, with Samsung at just 12 percent” (Financial Times, 2018).

    Apple’s pricing strategy also focuses on another side of differentiation that sets it apart from its competitors. While the company focuses on the high-end smartphone and set it at a premium price, it also introduced a lower vision of the high-end smartphone. For instance, with the appearance of iPhone XS Max, Apple Inc. also introduced the 750$ iPhone XR- a much cheaper vision compared to iPhone XS Max, but it shares some of the characteristics that an iPhone XR possesses. Apple had done this strategy before, when the first version of iPhone 5 came out, alongside there was this plastic 5c in 2013 that uses the lower-priced material. Since iPhone 5 series was introduced, each year there were a high-end series and a relatively lower vision- iPhone 6 and iPhone 6S, iPhone 6 Plus, and with the appearance, there were iPhone 7 and iPhone 7s… As a result, unlike other companies producing only one product for one generation, Apple Inc. provides options for customers to choose and even those with ambitions to purchase high-end smartphone but are unable to afford for the high-end ones. This is how Apple utilizes differentiation of Porter’s generic strategy to set up its pricing strategy.

The strength of Apple’s pricing strategy is that each iPhone and other products it sells, Apple company can extract a higher revenue compared to other smartphone companies. This means that Apple has a higher profit margin. Another strength is the customer loyalty Apply Inc. can gain from its high-end electronic devices; Since only a group of people can afford for such a price of a smartphone, and they are satisfied with the unique value of the product, they will be looking for the product the company designs and innovates. Despite the pricing strategy Apple Inc. uses for expanding its market in both domestic and global markets, some problems might be the dilemma for Apple Inc. For one thing, Apple Inc. needs to continuously deliver the unique attributes that are valued, which means that when the company has to find a way to be the one that innovates high-end smartphone in the market; it has to be unique to worth the price which set Apple Inc. apart from its competitors. Another shortage for this pricing strategy is that Apple needs to defend against imitation; once other companies copied its technologies and made something similar as high-end iPhone or other electronic devices Apple designed, it is only a matter of time other companies replace Apple Inc. as the price would be much lower than this high-end smartphone Apple had made to expand its market. I believe that innovation and technology are the keys to overcome these potential shortcomings. When Apple manages to find a way that it can always deliver the unique attributes that are valued, it will be less worried about imitation because no other companies can achieve the technological breakthrough as Apple does. Since customers could not get what they what from other companies but only Apple, the company does not have to worry about customer loyalty anymore. Apple can also lower prices to overcome the shortcomings, but as it mentions above, it has already achieved so. Differentiation in Apple’s pricing strategy is working well as Financial Times (2018) states the pricing mastery of Apple, but it has to take care of innovation and technology to maintain its high-end smartphone market.

References

• Apple Inc., (2013). Form 10-K. Cupertino, CA, United States of America: Apple Inc.
• Financial Times (September 14, 2018). Latest Apple iPhones display’ pricing mastery.
• Financial Times Limited. London, England.
• Financial Times (August 2, 2018). Apple’s strength challenged by China threats.
• Financial Times Limited. London, England
• Pratap, A. (2017, August 24). Apple’s Generic and Intensive Growth Strategies. Retrieved
• November 3, 2018, from https://www.cheshnotes.com/2017/07/generic-and-
• intensive-growth-strategies-of-apple/
• Usman, Mohammd & Shabbir (2015). A Critical Analysis of Internal and External             Environment of Apple Inc. International Journal of Economics, Commerce and       Management. Vol. III, Issue 6, pp.955-967