> First, Apple has the tablet component market sewn up. An entrepreneur I talked to in China described the difficulty he still has buying touchscreens that are worth a darn. The real reason most of the current tablets are 7 inches? Because Apple bought up all of the 10-inch capacitive touchscreen stock and if they didn’t then they drove the price too high for smaller orders. There is no way to dabble in the market without paying a premium.

Most people attribute Apple’s stunning financial performance to its differentiated products, which integrate excellent hardware, software, and content. If you dig deeper, however, you realize that other critical factors have played a substantial role in Apple’s financial performance over the last decade.

One factor rarely discussed in detail, but that has significant impact on Apple’s success, is the way in which the company manages the critical forces within its industry. There are five key industry forces, according to Michael E. Porter, but here I just want to focus on one force: “the bargaining power of suppliers.”

Let’s start with the iPod and iPhone. Most iPod’s except for the “Classic,” rely on flash memory -- instead of a hard drive -- for storage. The benefits of flash memory are reliability, form factor, and energy consumption. Realizing the significant benefits of flash memory for portable media devices, Apple formed long-term relationships with Samsung, Intel, and Micron, and by mid-2007 commanded about 25% of worldwide flash production.

Fast forward to today, and we are seeing a similar scenario unfold for the iPad and the tablet market. It turns out that Apple has secured about 60% of global touch panel capacity, with a focus on 10-inch displays. As mentioned in the article, this has forced some competitors to initially focus on devices with 7-inch screens, such as Samsung with its Galaxy Tab.

What’s the effect of commanding such a large portion of the worldwide supply of a key component for a product?

First, because Apple is buying these components in such large quantities it can exercise significant leverage over suppliers. This leverage enables Apple to negotiate favorable terms and pricing. For instance, South Korean Fair Trade officials alleged that Apple struck a special deal with Samsung to obtain flash chips at below market rates. This favorable pricing means that Apple has a lower cost structure for its products relative to competing products. And all else equal, this lower cost structure results in higher margins for Apple versus a competitor.

Second, when Apple commands such a large portion of the global market for a key component it creates enormous barriers to entry for potential competitors. Competitors can obtain the component in limited quantities but at a higher price, therefore placing the competitor at a cost disadvantage. Next, the competitor can launch a different product -- a hard drive based portable media device or a 7-inch touch screen tablet – that may not match the preferences of consumers. Alternatively, the competitor can just sit and wait until more supply of the component is made available, which in some cases takes years.

In sum, Apple’s financial success as a company hinges in part on commercializing differentiated products. But this is just part of the story. As important to Apple’s success is the company’s strategy around managing key industry forces. As described above, Apple’s control over the worldwide market for key components has reduced Apple’s cost structure and has created significant barriers to entry for competitors. This yields significantly higher margins and market share for Apple, among other benefits.