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Table of Contents

1. Apple in China .....................................................................................................................2 1.1. 2. Target Market and Products ..........................................................................................2

Analyzing Apples External Organization ............................................................................2 2.1.1. 2.2. 2.3. Apples PEST analysis ...........................................................................................2

Porters Diamond of National Advantage ......................................................................3 Porters Generic Strategy of Apple in China ..................................................................3 Scenario Analysis (Viewing Risk) ..........................................................................4

2.3.1. 3.

Analyzing Apples Internal Organization .............................................................................5 3.1. Apples RBV Analyses in China ...................................................................................5

4.

Competitors Analysis ...........................................................................................................7 4.1. 4.2. 4.3. 4.4. 4.5. Competitors Objectives .................................................................................................7 Competitors Current Strategy ........................................................................................7 Competitors Assumption..............................................................................................8 Competitors Resources and Capabilities ........................................................................8 Apples SWOT Analysis Vs Key Competitors Strengths and Weakness ........................9 SAMSUNG Strength and Weakness .................................................................... 10 LENOVO strength and Weakness ........................................................................ 10

4.5.1. 4.5.2. 4.6. 5. 6.

Competitors Response Profile and Conclusion ............................................................ 11

References ......................................................................................................................... 12 Appendices ........................................................................................................................ 13

1.

Apple in China

Apple is committed to bringing the best personal computing experience to students, educators, creative professionals and consumers around the world through its innovative hardware, software and Internet offerings. The Apple, Inc. U.S. headquarters is located in Cupertino, California. Apples goal is to provide customers with the best personal computing experience by offering products with superior ease-of-use, seamless integration, and innovative industrial design and a high quality sales and post-sales support experience.

1.1.

Target Market and Products

Apples target market falls into these categories; home users, small and medium sized business, education segment, younger generation and creative individuals aka Mac users. Apple is a luxury brand and the company still ranks in the top five of the most coveted brands among Chinas monied class, according to the latest Hurun Chinese Luxury Consumer Survey. Apple products consist of; iPhone series, Macintosh, iPod series, iPad, iMac, Mac Mini and Apple TV. (Appendix G: Apples product and prices in China)

2.
2.1.1.

Analyzing Apples External Organization


Apples PEST analysis

Political: China having a communistic government causes heavy restrictions in many areas especially the Internet, the press, freedom of assembly, reproductive rights, and freedom of religion. Companies such as Facebook and Google face strong restrictions in China. In contrast, Apple mainly sells hardware, so it has not run into any censorship problems. Economical: In the 4th quarter of 2012, Chinas GDP increased from $7298.10 billion to $12.382 trillion indicating an increase by 7.9%. This is a favorable economy for Apple as the economy continues to boom elevating high consumer spending, national income and employment. Social: Chinese consumers love electronic gadgets. Mobile phones are ubiquitous. Apple is doing incredibly well because its products are so much more attractive and pricy. The iPhone quickly become a status symbol product in Chinese social circles since its debut (J. Chiang, 2013)
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Technological: In China, there is fast improvement in electronic technology which is becoming a fast applied threshold in many industries. Apple is leading the position in electronic IT industry which just matches the trend of electronic technology. Due to the pollution control policies in China, Apple Redesigned their product to lighter weight packaging to reduce emission during transportation. This shows its ethical consideration in green marketing.

2.2.

Porters Diamond of National Advantage

Factor Conditions: China is one of the worlds largest growing economies for its skills and technology, which provides more innovation for Apple. Chinas high skilled workforce creates more advantages for Apple in the sense that rich amount of raw materials and cheap labor through the use of sweatshop is well leveraged. Demand Conditions: Apple being a Famous successful Company has caught the attention and motivation of Chinese 1st class citizens and prestigious youths, thus sending the right signal and increasing the demand of Apple products especially in smart phones and iPad industry. However, Apple is pressured to reduce its price in other to meet the demand of second tier cities that may not be able to afford Apple products. Its been argued that doing so would be detrimental to Apples image but yet again it could pose as a competitive advantage over competitors.
Related and supporting Industries: Apple as a foreign company in China ensures that its supply

chain adapts to the needs of its niche market in a timely manner while justifying high prices for quality innovative product.
Firm Strategy, Structure, and Rivalry: In China, major successful companies are often

centralized. When China joined World Trade Organization, many Chinese tariffs and other trade barriers reduced, allowing other rivalry like Samsung to compete more strongly in China. In China, management compensation is heavily based on annual bonus tied to group result. China having a low individualism index, do not base much thoughts on individual motivation but channel effort on innovative minded groups which Apple employs to attach prestige to its image. Appendix D elaborates Apples Porters five forces in detail.

2.3.

Porters Generic Strategy of Apple in China

Apple has always been using the differentiation leadership strategy. Differentiation is about creating a unique value in a product and giving customers clear reasons to prefer the product
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over other less differentiated products which they will be willing to pay a premium price. Using this strategy, Apple tends to apply for specific and selected market segment and provide its substantial price premium to its targeted market. Apple offers its niche members a product or service customized to their tastes and requirements and are geared towards customers with the ability to spend more. Apple does not rely on cost leadership strategy to compete. Their business and brands are built on persuading customers to become brand loyal and paying a premium for their products. Apple has managed to build substantial Value over the years in a strong competitive PC and Smart phone industry by innovating and forging a part considerably different from other big competitors in the industry. Apple's products is based on quality, design, elegance, and superior customer service, while outsourcing actual manufacturing to trusted Original Equipment Manufacturers (OEM) allows it to differentiate its products from those of its competitors. Apples differentiation strategy has made it most attractive and seen as a prestigious brand by the Chinese most elite customers. However there are risks that Apple needs to be aware of which includes imitation and losing its distinctiveness and focus. This possibility of this risk could be weighed in a scenario analysis.
2.3.1. Scenario Analysis (Viewing Risk)

The key analysis is whether Apple can remain distinct and focused in the Chinese Market. Chinese Telcos look to Boost Margins with Cheaper Smart phones. These smart phones will be provided by Chinese handset makers such as ZTE, Huawei, Lenovo, Coolpad, TCL and SED (Trefis Team, 2012). Since a majority of Chinese still cannot afford to pay for the higher-end smart phones, this strategy will reap huge dividends for these Chinese manufacturers. When these phone manufactures releases the production of cheaper smart phones into the 3 rd tier cities of over 300 million people, Apple marginal value may not be affected since the number of middle class earners is estimated to grow 70% to 600 million by 2020 (K. Voigt, 2012). According to an interview conducted by Shaun Rein (2012) in 15 cities, 5,000 Chinese consumers trust foreign brands far more than they trust local domestic brands. (Appendix A: Self-sketch of Apples Scenario Analysis and Future factors) Nevertheless, the risk/rocky aspect comes to light since these Chinese manufacturers have formed an alliance which will make it more difficult for Apple to single any one manufacturer out for patent infringement. If Apple fails to hinder the growth of these manufacturers with
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lawsuits, it may be forced to lower the prices of its smart phones against its principals. Doing so may tarnish the premium image of Apple and erode the love and loyalty of the Chinese customers. As a result, the customers may no longer value the product's factors of differentiation and may fall just like Nokia did. Therefore from this scenario analysis, Apple can remain distinct and focused in China if it continues to be innovative and maintain its premium price to satisfy the prestigious demand of the Chinese customers.

3.

Analyzing Apples Internal Organization

In other to analyze Apples internal organization in China, its required to scrutinize Apples portfolio of resources and capabilities that are created from such resources.

3.1.

Apples RBV Analyses in China


Apples Resources Capability
Heavy Investment in Research & Development

Tangible
Financial Resources

Net sales of $156.50 billion in its 2012 annual report, up from $108.24 billion in 2011 Outsourcing manufacturing processes to OEM partners in china (Foxconn and Hon Hai precision industry) PC constructed of solid aluminum blocks and strong polycarbonate plastics Top retailer in in-store sales (8 stores) Tailored hardware and software Redesigned lighter weight packaging

Organizational Resources

Global Mindset

Physical Resources

Exceptional Design Strong Market Presence

Technology Resources

Unique Brand image A greener Apple

Intangible
Human Resources Teamwork is included in Apples organizational culture Design teams, software development teams, and hardware engineers Offers a variety of attractive employee benefits to complement direct wages. Apple Care Support website Apple Care Protection Plan Apple Care Helpdesk Support Apple Care Professional Video Support Apple Care Technician Apple offers in-store one-on-one support to all customers and further warranty support Good relationship with OEM
partners

Industrial Design Capability Talented Software Programmers

Innovation

Consistent Quality

Reputational Resources

Outstanding Customer Service

Bearing in mind that capability is not a competitive advantage; using the Barney VRIN as a tool, Appendix C indicates built core competences that will serve as a source of competitive advantage for Apple over its competitors in China. Capabilities valuable, rare, costly to imitate and non-substitutable are core competences. According to Michael A. Hitt., et al (2008), Capabilities failing to satisfy the four criteria of sustainable competitive advantage are not core competences, meaning that although every core competence is a capability, not every capability is a core competence. Appendix C illustrates that Apple has strong sustainable advantage on most of its capabilities despite high presence of substitutes. Understanding Apples internal performance, Appendix C clarifies that Apples Talented Software Programmers falls on a competitive parity due to the fact that in China, such talented skills are not rare within the industry, and are not difficult to imitate. However Apple has continued to be ahead of the game as they invest heavily in R&D, increasing innovation that is rare and costly to imitate.

4.

Competitors Analysis

Apple has a highly innovative product line that aims to offer a cutting edge and highly integrated user experience. Since Apple has diverse product lines, it faces competition from both Mobile and PC industries. In china, Apple has two major competitors: Samsung and Lenovo and in other for Apple to formulate its business Strategy, it must consider the strategies of its main and potential competitors. To do this, Michael Porters competitive analysis framework is used.

4.1.

Competitors Objectives

It is important to understand what objectives a competitor has, as this will enable a company to predict what the competitor will do in the future, and how their behavior can be altered (Michael Porter, 1980). In other to stand out of about 100 Chinese smart phone companies, Lenovo worked with Intel (INTC) to launch the K800, the first phone in the Chinese market to run on Intels newest Atom chip, Lenovo plans to announce five new models in 2013. Lenovo is trying to take advantage of its well-known PC brand to target smart phone customers in 2nd and 3rd tier cities. And Lenovo plans on opening an additional 300 stores in China in 2013 to add to its 100 existing stores in China. Samsung is reportedly working to launch an entry-level smart phone in the Galaxy series. According to SamMobile, Galaxy Star is expected to hit stores around midApril (Rohit KVN, 2013)

4.2.

Competitors Current Strategy

Samsung spend billions of dollars on promotion strategy for advertising campaigns across North America, Europe and Asia. They use celebrities such as Black-eye Ps to promote their products. Their products are sold mostly online where customers can get free shipping. Lenovos strategy is dynamic and keeps changing as the situation demands. They are flexible to the demand of the Chinese customers. However, Lenovo struggled to get local consumers to buy its phones when millions of Chinese were embracing the iPhone, Lenovo was still pushing basic handsets (Bruce Einhorn, 2013). Lenovo has implemented an aggressive strategy to replace Samsung as the Mainland China market's top smartphone manufacturer as they changed their one-size-fits-all LePhone strategy and built a portfolio of 19 smart phones, ranging in price from $130 to $385. That strategy helped Lenovo surpass Apple in 2012 and move into the No. 2 position behind Samsung. Its mobile Internet business accounted for 8 percent of total revenue in the third quarter of 2012, up from 3.6 percent a year earlier, and mobile revenue was 18 percent of China
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sales. It has spent $793.5 million in Wuhan in order to build a plant that can produce 30 to 40 million phones per year (Bruce Einhorn, 2013). Lenovo cited their desire to take advantage of increased sales due to the 2014 World Cup that will be hosted by Brazil and the 2016 Summer Olympics and CCE's reputation for quality.

4.3.

Competitors Assumption

Samsung and Lenovo along with major mobile companies assume that the era of basic phones are over and such market deserted. In actuality, that assumption is somewhat false in the case of rural areas populated with elderly customers who may find smartphone too complex and prefer a basic phone. After Lenovo introduced their first smartphone named LePhone and failed, they assumed smarter phones is what the market demands. This assumption places an opportunity and threat if Apple decides to use its strong brand name to create a market for basic phones and reduce price as seen in the scenario analyses. Honestly, the opportunity isnt worth taking. Apple must remain innovative in the smartphone industry as they compete with the global mindset of forward ever and backward never.

4.4.

Competitors Resources and Capabilities

Financial Resources and Capabilities Lenovo invested US$793 million in the construction of a mobile phone manufacturing and R&D facility in Wuhan, China. Lenovos revenue as of 2012 amounted to US$29.57 billion. Samsung Electronics amounted to revenue of US$185.30 billion in 2012. Lenovos operating income of US$584 million grants them more advantage in R&D over Samsungs operating income of US$267.65 million. Physical Resources and Capabilities: China as the worlds largest smartphone market remains the primary market in which Lenovo Mobile operates and has expanded sales into Russia, Indonesia and India, with further expansion intended. Samsung recognized for its superior-quality screen and excellent connectivity. Samsung became the world's largest cell phone maker in 2012, with the sales of 45 million smart phones in the first quarter.

Technological Resource and Capabilities Samsung has some of the best resources in semi-conductor products, highly skilled engineers and designers, a much broader access to market around the world with lot more touch points to end customers. Lenovo only manufactures phones that use the Android operating system from Google. Numerous press reports indicated that Lenovo plans to release a phone based on Microsoft's Windows 8. Innovation Resource and Capabilities Samsung Galaxy S adopts Google Android as the primary operating system. It also supports other competing operating systems such as Symbian, Microsoft Windows Phone, Linux-based LiMo, and Samsung's proprietary Bada. Human Resources and Capabilities Samsung Elecronics as at 2012 has a total number of 221,726 employees while Lenovo employees accrue to a number of 27,000 employees. Apple has unique advantage through its retail presence that Samsung lacks. Apple can carry out a lot without relying on carriers or other retailers to make a significant impact through its marketing tactics unlike Samsung.

4.5.

Apples SWOT Analysis Vs Key Competitors Strengths and Weakness

Apples Strength: Leaders of innovative and high tech quality products like iPhone, iPad and iMac. Globally recognized brand name and Large Marginal Value Large segment of loyal customers to Apple culture. Strong R & D department and Large Market Share in China Unique product differentiation and Strong placement in Education segment

Apples Weakness: Poor sales from iTunes store as Chinese are customarily unwilling to pay for intellectual properties. Without constant innovation to set itself apart from its competitors, Apple s products may appear overpriced in comparison to its Chinese rivals Apples Opportunities Penetration into more China cities as population increases Growing market of green and energy efficient product
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Building more retail stores in China and boom of China economy Apples Threats Highly dependent on consumer purchase Highly competitive environment Pressure of constant innovation In China, imitation, Patent and copyright infringement remains high. Pressure to reduce price
4.5.1. SAMSUNG Strength and Weakness

Samsungs Strength Wide range of product portfolio which includes Mobile phones, Tablet, TV/Audio/Video, Camera, Camcorder, home appliance, PCs, laptops, peripherals, printers Well diversified and differentiated product line to meet changing customer needs. Strongly going ethical given its Chinese suppliers two years to eliminate illegal work practices. High Market Share that continues to grow in the Chinese market and Strong brand name Samsungs Weakness Average prices of product is seen to be of low product in China Not pro-active in introducing a new product and Not user friendly Insufficient software or talent engineer to make their own Heavily investing in the development of newer market and not focusing on any core competencies.
LENOVO strength and Weakness

4.5.2.

Lenovos Strength Chinese owned company with wide range of product portfolio; PC, tablet, mobile phones, workstations, servers, electronic storage devices, IT management software and smart televisions. Operates in more than 60 countries and sells its products in around 160 countries The IBM name has helped Lenovo maintain its solid base with customers in the corporate market

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Lenovos Weakness Difficulty in expanding abroad Brand name is not iconic

4.6.

Competitors Response Profile and Conclusion

From the competitors objectives, strategies, assumption and resources obtained, Apple can see that while its fighting over patent infringements with Samsung, a bigger potential competitor, Lenovo aims to shoot. Apples strategies of differentiating have been imitated as Lenovo strategizes on cost leadership and focus differentiation, offering a hybrid market positioning to Chinese customers. Constant innovation is all Apple has now as a unique capability as both offensive and defensive mechanism in entering new markets and competing with rivals. Apple and Samsung have mutual threats in China as low cost competitors like Lenovo increases in the smart phone industry. Looking at Apples pricing strategy in Appendix B; reducing the price to compete with Lenovo (penetration pricing) is not an option as this would affect the way the brand is perceived by the Chinese customers. The Chinese vendors are like a pack of wolves snapping at Samsung and Apples heels, says IDCs Wong. With the resources available to Samsung and Lenovo, Apple may be well assured that whatever strategy it pulls off in China can be imitated. Hence, Apple can increase its cost of imitation into three features that all lead to the robustness of strategic capability. This is illustrated in Appendix F as Complexity, Culture and History, and Casual ambiguity (G. Johnson et al, 2005). At the end on Q4 2012, Apple was displaced from number two to number six in the Chinese smartphone market. However, Apple continues to stand strong despite strong competition in China. In other for Apple to remain distinct, it has to invest more money from its cash cow into innovation that is costly to imitate. In as much as this might become a challenge due to the strategic alliance of many Chinese smartphone firms, Apple should continue to sue any company that infringes its patent and copy right. Such injunction will pose a threat to current and potential imitating competitors. The expansion of Apple stores in needed to capture economies of scale into more cities in China. The competition wont get any easier in the smartphone industry that in the long run, I predict that Apple and Samsung may decide on becoming Joint Ventures or Strategic Alliance to survive. But till then, let the battle drums continue to roll.

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5.

References
1. Bruce Einhorn, (2013). In Chinas smartphones; Lenovo gets busy. [Online] Available at: http://www.businessweek.com/articles/2013-01-03/in-chinas-smartphone-market-lenovogets-busy [Accessed on 22nd February, 2013] 2. G. Johnson et al, (2005). Exploring corporate strategy. 7th Edition. Pearson education limited: Harlow

3. Jeongwen Chiang, (2013). Why China Loves Apple. [CNN Online] Available at: http://www.realclearworld.com/2013/01/16/why_china_loves_apple_144300.html [Accessed on 16th February, 2013] 4. Kevin Voigt, (2012). Apple, China, Foxconn and the Fabulist. [Online] Available at: http://edition.cnn.com/2012/03/19/business/apple-china-foxconn-daisey [Accessed on 17th February, 2013]

5. Michael A. Hitt, R.Duane Ireland, Robert E. Hoskisson (2008) Strategic Management Concept. Business, Accounting & Vocational: Textbooks & Study Guides. Cengage Learning EMEA. London: UK 6. Michael E. Porter, (1980) Competitive Strategy: Techniques for Analyzing Industries and Competitors. 1st Edition. New York: Free Press

7. Rohit KVN, (2013). Samsung planning to lunch Entry-level Smart phone Galaxy star at MWC 2013 report. [Online] Available at: http://www.ibtimes.co.in/articles/438132/20130222/samsung-galaxy-star-mobiletechnology-launch-february.htm [Accessed on 19th February, 2013] 8. Shaun Rein, (2012). What do Chinese Consumers want? Not Barbie. [Online] Available at: http://edition.cnn.com/2012/11/21/business/china-consumers-barbie [Accessed on 20th February, 2013]

9. Trefis Team, (2012). Apple may need cheaper phones to compete in China. [Online] Available at: http://www.forbes.com/sites/greatspeculations/2012/01/11/apple-may-needcheaper-phones-to-compete-in-china/ [Accessed on 17th February, 2013]

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6.

Appendices

Appendix A: Free sketch of Apples Scenario Analysis and Future factors


High A C B D A: B: C: State of Chinese economy Loyalty of Chinese consumers Fair and Just competition

Potential Impact

D:

Consistency in brand Price

Low Low High

Uncertainty Appendix B: Apples pricing strategy Vs Competitors

Low Low

QUALITY

High

Economy

Penetration

PRICE

Skimming

Premium

High

Pr

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Appendix C: Building Apples Core Competences in China Capabilities Value


Yes

Rare
Yes

Costly to Imitate
Yes

Non Competitive substitutable consequences


No Sustainable competitive advantage Sustainable competitive advantage

Performance implication
Above average returns

Heavy Investment in Research & Development

Global Mindset

Yes

Yes

Yes

No

Above average returns

Exceptional Design

Yes

Yes

Yes

No

Sustainable competitive advantage

Above average returns

Unique Brand image

Yes

Yes

Yes

No

Sustainable competitive advantage

Above average returns

Strong Market Presence

Yes

Yes

Yes

No

Sustainable competitive advantage

Above average returns

Industrial Design Capability

Yes

Yes

Yes

No

Sustainable competitive advantage

Above average returns

Consistent Quality

Yes

Yes

Yes

No

Sustainable competitive advantage

Above average returns

Outstanding Service

Customer

Yes

Yes

Yes

No

Sustainable competitive advantage Competitive Parity

Above average returns

Talented Software Programmers A Greener Apple

Yes

No

No

No

Average returns Above average returns

Yes

Yes

Yes

No

Sustainable competitive advantage

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Appendix D: Apples Porter five forces


COMPETITORS Samsung and Lenovo are Apples strong Competitors in China. They each have strong market presence. However, Apples products are highly differentiated in terms of design and functionalities as compared to its competitors products. With continuous innovation, Apple will sustain this competitive advantage. SUPPLIERS The bargaining power of suppliers for hardware products is low as the industry is highly saturated, causing suppliers to be competitive in their pricing. Apple adopts a differentiation strategy which requires the firm to ensure that suppliers provide high-quality components, driving up its supplier costs. SUBSTITUTES China known for high skills in the electronic industry leaves Apple with the threat of many substitutes ranging in quality and cheaper price.

SUPPLIERS

THREATS OF NEW ENTRANTS


ENTRANTS Apples strong present in the Smartphone and PC industry in China is valuable, rare, expensive to imitate. Potential entrants will not only find difficulty in winning the market share over, but also require a significant investment of resources to compete with Apple.

RIVALRY AMONG EXISTING FIRMS

THREAT OF SUBSTITUTES
BUYERS

Apples innovative brand still presses this threat to a medium.

BARGAINING POWER OF BUYERS

Due to many competitor product substitutes in China, theres high bargaining power of consumers. Nevertheless, Apples unique products and a loyal customer base reduce the price sensitivity of the Chinese customers at least to those that can afford it.

Appendix E: Self-Sketch of Apples BCG Matrix vs. Competitors Attractiveness


Samsung Apple Smartphone Lenovo Mobile

High

Market Growth
Low High

Relative Market Share

Low

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Appendix F: Increasing Apples cost of imitation inspired by G, Johnson et al, (2005)


Complexity Innovating Smartphone with features such as 4G, backscatter X-ray, Fire & water proof Culture & History Improve slogan to Think Different; Act different Continue to pass down Steve Jobs legacy and Vision

Robustness of strategic Capability

Casual Ambiguity Talented team should work under oath of secrecy and commitment

Appendix G: Apple products and Price in China Series Computer Type Price

iMac, eMac, Mac mini, Power Mac, Xserve RAID, Mac 3000 - 20000 Pro, iBook , MacBook, MacBook Pro, MacBook air iPod, iPod mini, iPod nano, iPod Shuffle, Apple TV, 300 - 3000 iPod classic, iPod touch, iPad 2000 - 5000

Digital

Mobile

iPhone, iPhone 3GS, iPhone 4, iPhone 4s.

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