1. IBCON – Global Strategic Management
Georgi, Alexander (ID: 332765)
Case: Apple Inc. 2010 – One pager case questions
October 2011
Question: Please explain the major reasons for the persistently low average profitability (return on
sales) of the global PC industry in the last decade.
The global PC industry is weaker than ever, and has moved towards commoditization during the last
decade. In August 2011, HP’s CEO Leo Apotheker announced that the company is thinking about selling
their PC business because of its low profitability and slow growth rates1. As Porter’s five forces model is
an acknowledged framework in order to analyze the profitability of industries, it will be used for
assessing the global PC industry in this paper.
The bargaining power of suppliers is one force which influences the level of competition in an industry.
Particularly in the PC market it is a crucial factor because the supplier’s power is very high. Even though
there is a large number of suppliers for low cost or less important components such as keyboards, card-
readers or other mostly standardized parts of the PC, the major inputs are monopolized by dominant
suppliers such as Microsoft for the Windows OS or Intel for microprocessors. Furthermore, the quality
and, therefore, the benefit for the consumer is highly dependent on the software and the performance
of the device. Both attributes are mainly influenced by major suppliers of the PC manufacturers. Hence,
Intel with its ~80% market share has a significant market power.
Similarly, the bargaining power of buyers is also very high. The PC industry is one of the few in which
the consumer expects each new model to do more, but cost less. This underlines the high price
sensitivity of the buyers. In addition to that, there is only low brand-loyalty. Thus, customers will not
hesitate to switch the brand, with the exception of Apple fans maybe. This not only holds true for
private customers but also for companies, governments or educational institutions. Most of the
customers use their PC as a tool and therefore primarily decide for a product based on price.
Besides these two sources of vertical competition, the competition from substitutes is a source of
horizontal competition. Ten years ago, there was a strong presence of PCs throughout society with the
threat of substitutes being very low. However, this changed over the last years. Smartphones and
tablets became more and more attractive to a wide range of customers. Ben Worthen of "The Wall
Street Journal", for example, believed that the success of Apple’s iPad has caused HP’s thinking to spin
off their PC business2. Moreover, Microsoft’s Xbox and Sony’s Playstation including their network
platforms could also be seen as possible substitutes, especially with regards to younger people. But in
general, the threat of substitutes is more low than high.
The competition from established rivals is very high. Due to the fact that their products are rather
similar regarding the software installed and hardware performance, the competitors are highly
aggressive and a kind of a price war exists, resulting in a market of low margins.
Lastly, the level of competition of entrants is neither high nor low in the PC business. On the one hand
there are no legal or governmental barriers to get to the market, plus a high standardization of the
products, but on the other hand it is not attractive to get in due to low profitability.
To sum up, the main reasons for the average low profitability of the global PC industry are the high
bargaining power of suppliers and buyers as well as the strong rivalry among existing firms, as outlined
above.
1
At the moment they are rethinking their decision because recent studies show the costs could outweigh the
benefits (see “H-P Rethinks PC Spinoff”, The Wall Street Journal, October 2011, 12,
http://online.wsj.com/article/SB10001424052970203499704576625434293946542.html, accessed October 2011)
2
„HP Plans To Spin Off PC Business“, npr.com, August 22, 2011, http://www.npr.org/2011/08/22/139859318/hp-
plans-to-spin-off-pc-business, accessed October 2011