Management Development InstituteGurgaon

Assignment on Create a scenario for tablet as standalone product of consumer electronic industry with a time horizon of 10 yrs. Visualize Apples position in it and advise what should Tim Cook do?

Course Strategy Formulation and Implementation

Submitted toProf. Veeresh Sharma MBA Ph.D.MDI, gurgaon.

Submitted bySarvesh Kumar VRoll No: 38, Class: NMP28

30th May 2015Create a scenario for tablet as standalone product of consumer electronic industry with a time horizon of 10 yrs. Visualize Apples position in it and advise what should Tim Cook do?

1. Introduction:

Global tablet sales market has grown tremendously between 2010 and 2013 in terms of value and volume. Over the past two years i.e, 2013-15, growth has decelerated. Apple has launched iPad on March 2, 2010. Since then it has taken First mover advantage till FY 2012 2nd Quarter in terms of Value and Volume. Google has released Android, an open source which made other market players easy to create tablet. Samsungs Tablet has become potential competitor for iPad. It has taken significant amount of iPads tablet market share. Emergent of other market players like ASUS, Lenovo also added to reduced market share of iPad in Tablet Market. Open source Android, reduced manufacturing costs in Asian region reduced the tablet prices which were built on Android. Customers attracted toward low prices of Android tablets and android apps, covers almost all the functionalities provided by IPad. Apple IPads Market share has been reduced from 60.3 in Q2 2012 to 28.1 in Q4 2014, as shown in the Table 1. Its Net sales have posted negative growth of 5.31% in 2014 compared to 2013 in value as shown in Table 2. And its net Volume also post negative growth of 4.30% in 2014 compared to 2013 in volume as shown in Table 2. The global tablet sales market has total revenues of $73,081.5m in 2014, representing a compound annual growth rate (CAGR) of 59% between 2010 and 2014. Market consumption volume has increased with a CAGR of 91.2% between 2010 and 2014, to reach a total of 223.5 million tablets in 2014. Tough tablet industry is moving towards saturated growth, the future of iPad is questionable. We will analyse this in detail.

Table 1: Global market share held by tablet vendors from 2nd quarter 2011 to 4th quarter 2014, Source: idc.comAppleSamsungAsusLenovo*Acer*Amazon*Barnes & Noble*Pandigital*RCALG ElectronicsOthers

Q2 '1161.57.32.6-4.2-----24.4in %

Q3 '1159.76.53.81.1--4.52.9--21.5Incl HPin %

Q4 '1151.77.321.6-15.94.62.5--14.4in %

Q1 '1258.111.33.12.7-3.61.5---19.7in %

Q2 '1260.37.63.31.31.44.81.6---19.7in %

Q3 '1240.212.46.61.30.78.30.7---29.8in %

Q4 '1238.2135.11.30.79.91.9---29.9in %

Q1 '1340.217.55.41.32.13.7----29.8in %

Q2 '133318.84.53.33.4-----37in %

Q3 '1329.219.37.44.82.5---1.8-35in %

Q4 '1333.117.25.14.3-7.4----32.8in %

Q1 '1432.721.65.24.1-1.9---0.234.3in %

Q2 '1426.917.24.64.92-----44.4in %

Q3 '1422.818.36.55.7----4.9-41.8in %

Q4 '1428.114.544.8-2.3----46.2in %

Table 2: IPad unit sales and net sales information for 2010,2011,2012,2013 and 2014 (dollars in millions and units in thousands), Source: Apple Financial Reports (FY12, FY 14)2010%Change2011%Change2012%Change2013%Change2014%Change

Unit sales7,458NA32,394334.3558,31080.0071,03321.8267,977-4.30

Net sales $4,958NA20,358310.6130,94552.0031,9803.3430,283-5.31

Percentage of total net sales7.6%18.81%20%19%17%

Table 3: Global tablet sales market value: $ billion, 201014, Source: Marketline

Table 4: Global tablet sales market volume: million tablets, 201014

2. General Environment analysis: Based on population growth and economy growth apple should look forward to China and India. Both the countries economic growth is expected to increase at least 4.5% every year for next 10 years. Advent of digital era & internet era added by electronics industry growth makes customers to use luxury and necessary good based on the income levels. Electronic goods like Mobile etc., became a basic need and affordable to all income levels in India and China. Similar cases with most of the parts of the world. Low Manufacturing cost in Asia Pacific region because of low wage rates compared to other parts of the world with same competency. Markets in America and Europe region are more of quality oriented and less of price oriented. Markets in Asia-Pacific are more of price oriented.

3. Industry Environment analysis:

a. Threat of New Entrants:i. Although tablet market is dominated by large multinational companies (Apple, Samsung, Lenovo), which have high brand name, best supply chain, significant customer bases and better retail outlets, new entrants can enter into the market with little effort. Table 1. Shows approx. 40% of the market share is captured by small players. Eight large players occupying the rest, in which apple and Samsung has huge shares.ii. Low manufacturing costs coupled with price centric customer attitude can help new entrants.iii. New entrants need not required to do extensive research for manufacturing the tablet with existing functionalities.iv. Low manufacturing costs and outsourcing makes easy way to new entrants. v. E-retail, online selling and less product differentiation from competitors helps new entrants. vi. Emergence of low-cost chip manufactures, help new entrants to reduce costs.

All the above suggest threat of new entrants is high for tablet market, as entry barriers are very low. If any new market player acquiring brand image will be threat to apple and Samsung as it will take away part of their market share in units and value.

b. Power of suppliersi. Electronic Component manufactures and OS providers are major suppliers. Most of the tablet components have less differentiation between different brands, leading tablet market players to approach low cost manufacturing companies. There are a lot of low cost manufacturing companies, which will reduce suppliers bargaining power. ii. For some special components likes chips, suppliers are very limited. AMD, Intel, Nvidia and Qualcomm are only chip providers for some leading marketing players, which increases the bargaining power of suppliers. These four can charge substantial license fees for using their products.iii. There are instances where small suppliers were loaded with large orders and couldnt meet the demand. This will limit the production supply of tablets for the respective companies.iv. Low cost manufacturing regions like Asia will help tablet market players. This also reduces the suppliers power as cost labour is low in those regions. v. Apple has its own OS. Other market players who are using Android is open source makes power of suppliers low. But apple has to invest its own resources for upgrading its OS, but for other players, google will be doing it for them.vi. For specifically Apple iPad, network service providers didnt subsidize as they did it for smartphone. Customers paid for internet or relied exclusively on Wi-Fi network.

Considering all these points, supplier power is low for all except Apple. Suppliers power for specialized components like chips is high. Apple has to work on its own OS as well as bargain with service providers.

b. Power of buyersi. Most of the tablet market is forced by individual buyers. Enterprise segment buyers are also increasing still they have less control on market.ii. Customer giving importance to functionalities than technical specifications like screen size etc., and moving toward price sensitive.iii. Switching costs are easy as almost all market players are using Android apart from Apple. iv. Paid in apps are transferable from one to another device of different companies of same OS. This increasing the power of Buyers.v. Apple customers acquainted with iOS will not prefer other table products as all the apple products iPhone, Mac and iPad runs on the same iOS. Also paid in apps are not transferable as they are moving from iOS to android. All these provide buyers not to leave Apple.vi. As mentioned in the Table5, tablet market is more centered in America and Europe. With China, and India growing rapidly in economy and population, Apple can increase its market share by subsidizing and coming with contracts with some enterprises and educational institutions both in India and China.

Power of buyers is very high for players except apple. For Apple, customer are loyal and want to stick with apple despite high price charges but this limits new customers to buy iPad because of high prices and similar product functionalities available with same quality at low cost. Increasing Customer base is more important for Apple to sustain.

Table 5: Global tablet sales market geography segmentation: $ billion, 2014. Source: Marketline

c. Product substitutes

i. Phablets, Smart Phones, PCs, Portable gaming Consoles and Low cost Smart TVs are substitutes for Tablet Industry. ii. Phablets and Smart Phones pose potential threat to tablet industry as they fulfill all the functionalities of tablet including ability to make and receive calls. Smart phone are little back step for substitute because of screen size, but Phablets like Samsung galaxy note series meet every functionality and technical specification. iii. Gaming Consoles also pose threat to tablet industry. They are limited in terms of extra functionality.iv. PCs, right from the beginning, PCs and tablets are interchangeable substitutes. But PCs doesnt offer easy to use while transport. However notebook PCs, meeting the functionality of portable by being a PC.

As visible from the table 1 and table 4, which give global market share of different tablet players and tablet sales market volume for 2010-14, tablets industrys growth is decelerated. Tablets market volume has grown 283.5% in 2011, and reduced to 18.6% growth in 2014. Analysts are predicting even much lower growth moving forward. When tablet is 1st introduced other substitutes growth was decelerated. Now it depends on the market players how innovative they will be in keeping tablet in distinguishing tablet from other substitute products to keep tablet market sustainable. d. Product Complementsi. Apps (App store, Play store), Books (Book Store), Online Music (iTunes), Games, Internet, Storage services (iCloud, Dropbox), Media are complementary products.ii. These complements will help tablet industry, however almost all the complements are also available in the substitute products like Smart phones and Phablets. iii. Any advancement in the internet like 4G, free wifi outlets, important app developments will complement tablet.

So Apple and other product manufactures should develop complimentary products which are only specific to tablet and shouldnt be available for other substitutes, else the survival of tablet is questionable with phablets and other smart phones doing the same job.

Table 6: Apple Inc. revenue breakdown for fiscal years 2011 and 2013 by product (year-end September) (%) Source: Apple Annual Reports

e. Intensity of rivalry i. Samsung, Asus, Lenovo, Acer, Amazon, Barnes & Noble, Pandigital, RCA and LG Electronics are the competitors for Apple. Apart from this there are other small players which all together have a market share of 46.2% by 4th quarter 2014. ii. Though rivalry is intense, apple mainly focuses on the elite group. It doesnt want to dilute the Customer base. In US it has good market share in individual and education sector as well. All the apple products are treated as elite group products including iPad. Apple is capable of adapting to any changes in the market as they have strong R&D team and high intellectual property. iii. Rivalry is intense because of the factors low manufacturing costs, easy entry to small players and open source OS i.e., Android. But having easy entry doesnt mean brand building; they have to provide better service which can also be outsourced. So Anyone who have idea about industry and capital can bring competition in tablet market.iv. Having mentioned above points, Samsung can only be treated as potential competitor to Apple in the tablet market. Samsung has the brand name, capital and intellectual asset to take over the apple in tablet market. Starting with Market share of 7.3% in 2nd Quarter in 2011 it has captured the market share of apple, in 1st quarter of 2014 its market share is 21.6% and reduced to 14.5% in 4th quarter of 2014. v. Other major market players making tablets based on Android pose a threat to both apple and Samsung as they are providing low cost by using low cost manufactures, low cost suppliers and free Android.So we can say rivalry is intense.

4. Competitor Analysis:

a. Future Objectives:

i. Innovation: Apple is known for innovation, which Samsung and every other competitor are aware of. If Samsung has to capture apple market, it has to predict apples innovations in advance. Apple secrecy while implementing innovation projects is very high, giving access to few trusted employees. They developed so many products in secrecy with restricted environment. So theft of intellectual property is not possible, yet Samsung had infringed on five Apple patents related to the iPhones design and functionality, a lawsuit filed and apple won. Apple always ahead in predicting the customers future needs and providing them ahead of the competitor. Apart from Samsung, google is also competitor to Apple as OS developer of Android. Apple has to update its iOS on regular basis once in every 12 months as google is doing with similar frequency.ii. Increasing Intellectual property: Apple can analyses the Samsung and other large competitor recruitment advertisements and can have knowledge of the competitors intellectual assets. Also it can increase its own intellectual property to compete accordingly.iii. Integration: As per the vision Samsung, it might be integrating telecom, TV, Energy, Information and Health care. Apple is not successful in TV business. Apple has to be skeptical what Samsung can offer through integration and what it can from tablets.iv. Adaptable to Environment: Low cost producers will have advantage all the time, even in stable and recession market, as customers base will improve. Apple should make itself adaptable to future market. In Financial report also apple admitted that if market fluctuation reduces sale volumes, it will reduce the profit margin as it is a risk player.

b. Current Strategy:Apple current strategy is to have high price, good quality, innovative and high profit margins per unit sold. All the competitors are building products that are low price, good quality, less innovative, adaptable and get fewer profit margins per Unit sold. Apple is only for elite group and Samsung is for middleclass and elite group as well. Apple doesnt want to dilute its customer base. Samsung wants to have high market share through diluting.

c. Assumptions:i. Samsung cant know the innovations implemented by apple, till they are open to market.ii. Samsung will not integrate any functionalities of its tablet with Samsung TVs, as its leading manufacturer for smart TVs as well.iii. There will be little market fluctuations.iv. There will not be huge price hikes in energy. Less US Dollar fluctuations. v. Sovereign debt crisis, financial market volatility, and other negative factors in Europe will not be worsened.i. Increasing Intellectual property will keep on developing and less attrition.ii. Customer will keep on buying electronic goods whenever and wherever necessity/luxury is there.

d. Capabilities:Apple competitors are capable of adapting to the apple innovations in short period of time. Apple can still maintain its elite group customer base with its innovations with its intellectual assets. Samsung and other players are also capable of innovating new features to their tablets. It depends on how much frequency both delivers their innovations into the market?

e. Response:Apple can maintain its market share only if it meets the expectations of its continuous innovations to the market as providing the same updates to the other old customers. Its high price and high profit margin per unit can be detrimental to apple if any market/environmental fluctuations happen. It should distinguish its iPad from other substitutes with some specific features.

5. Suggestions/Conclusions to Tim Cook for next 10 years: Based on the analysis, substitute products will have huge impact on Tablet market. If iPad has to survive for next 10 years, it should be made distinguishable from its substitute products. There is intense competition, but Apple can survive competition, as iPad is targeted for elite group of customers with high prices along with innovative updates and distinguishable iOS similar to iPhone and Mac. This will return high profit margin per unit. Unlike competitors which have less profit margin per unit by low prices, Apple should also plan for risk management if any fluctuations in external environment as they are playing high risk role (as mentioned in financial report FY14), i.e., reduction in sales means reduction in huge profits margins. iPad should keep on providing incentives like iTunes, iCloud etc., Tim Cook should also maintain same work culture in the company as apple is having since long, highly intellectual employees and huge investments in R&D for innovations. Though iPad market is little questionable, Tim Cook can be confident of sustaining its market.6. Sources:1. http://www.mdi.ac.in/elibrary/Online_Resources.html2. www.marketline.com3. http://www.statista.com4. http://www.businessinsider.in/ 5. https://www.idc.com/6. https://en.wikipedia.org/7. Apple financial reports from https://www.apple.com8. Samsung Financial Reports from www.samsung.com9. https://www.google.co.in/10. www.forbes.com

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