Strategic Management
Industry Paper Final
Communications Equipment Industry
Mobile Devices Segment
Team Foxtrot
Fall 2009
Table of Contents
Introduction ................................................................................................................................................. 3
Description ................................................................................................................................................ 3
Segments ................................................................................................................................................... 3
Socio-Economic Factors ............................................................................................................................. 3
Relevant Governmental or Environmental Factors ................................................................................... 3
Economic Indicators Relevant for the Industry ........................................................................................ 4
Porters Five Forces ..................................................................................................................................... 5
Threat of New Entrants ............................................................................................................................. 5
Suppliers ................................................................................................................................................. 10
Buyers ..................................................................................................................................................... 12
Threat of Substitutes ............................................................................................................................... 15
Rivalry .................................................................................................................................................... 15
Conclusion ................................................................................................................................................. 21
Critical Success Factors .......................................................................................................................... 21
Prognosis ................................................................................................................................................. 22
Bibliography .............................................................................................................................................. 24
Appendices ................................................................................................................................................. 25
Industry Ratios ....................................................................................... Error! Bookmark not defined.
Other Relevant Indices ............................................................................ Error! Bookmark not defined.
2
Introduction
Description
The mobile device industry currently provides devices for approximately 4.1 billion users
around the globe. Given that two out of every three people on the planet own and use a mobile
device, this industry is key to providing essential tools for business, pleasure, and safety. The
industry first picked up steam when the company Motorola developed the first practical mobile
phone for use outside of a vehicle in 1973. The first citywide cellular network was then
launched by Japan in 1979 and then in the US in 1983, the first mobile phone was approved by
the FCC for use and made by Motorola. Since then customers have grown each year, phones
have gotten smaller and more powerful, and smart phones seem to have taken over in 2009 and
look to be the way we will do business in the future.22
Globally, Nokia is the world’s largest manufacturer of mobile devices, along with
Samsung, Sony Ericsson, Motorola and LG Electronics. While Samsung and LG Electronics are
major players in the mobile device segment, these two companies cross multiple industries and
will not be considered in this industry analysis. This analysis will focus on the US market
currently and the key players for this analysis are Apple, Motorola, Nokia, Palm, and RIM
(Research in Motion). Apple is represented as being the newest entrant with the successful
iPhoneTM and Motorola as an original mobile device manufacturer to give a broad spectrum for
analysis. These companies comprise many of the largest manufacturers distributing to the US
and will give a good overview of the industry and various products available to consumers.
Segments
Within the Communication Equipment industry, five main segments emerge. These
segments are: Mobile Devices, Enterprise Mobility Solutions, Mobile Applications, Home and
Network Mobility, and Mobile Computing Devices.1 The focus of this paper will be the Mobile
Devices segment.
Socio-Economic Factors
Relevant Governmental or Environmental Factors
This industry’s desirability is subject to multiple governmental and environmental factors.
The current regulation for the cell phone carrier industry is governed domestically by the
Federal Communication Commission. The allocation of frequencies is regulated by the FCC in
the US and by other agencies in foreign countries. There is a limited spectrum available to
wireless service providers. The impact of the most recent auction of the 700 MHz bandwidth by
the FCC is not known.23
3
Current safety of cell phone usage, in particular texting while driving has become an
issue. Laws have been passed regarding the use of cell phones in this regard. A current potential
solution has been proposed to place a device blocking text messaging in moving vehicles.
Controversy surrounding this device, and laws concerning the safety of cellular phones have
recently shadowed this industry.
Research studies have been performed linking the radiation emitted from cellular phones
to tumors. This has created some reluctance among subsets of users.24
Cell phone usage has multiple security issues. Information can be stolen over unsecure
networks (identity theft). Homeland Security has expressed concern because a cell phone can be
used as remote detonation devices for potential terrorist activities. This was found to be the case
in the post 911 Madrid Spain railway bombing.
International anti-trust regulations and standardization of cell phone carriers are a
concern for cell phone manufacturers. Multiple networks have developed and created a need for
phones to have multiple compatibilities increasing the need for larger storage and increased
technology innovation.
Government policy may favor government owned companies or those in which the
government has a controlling interest versus multinational corporations. Operating software for
wireless devices and other intellectual property does not have the same protection abroad as it
does domestically.
Standardization of communication protocols has been problematic. The formation of the
Interoperability Group (IOP) for the standardization of Multimedia Messaging Service is an
example of an attempt to introduce standardization. Exclusion from a group such as the IOP can
create difficult hurdles to overcome.
Economic Indicators Relevant for the Industry
The current global economic downturn which began in the second half of 2008 has
impacted the wireless handset industry, resulting in the slowing of end user demand. Industry
experts have predicted shipments to decline 10% which would be the first decline in handset
shipments since 2001. The expected decline would be a result of slowing growth in emerging
markets and decreased replacement sales in established markets. As a wireless carrier, Verizon
has had the slogan of “New every Two” providing end users with a replacement or upgraded
phone every two years locking wireless clients into extending their contract agreement by two
years. The economic downturn has created a subset of consumers who do not wish to be ties into
a contract in economically uncertain times.
Revenue is expected to decrease at an average annualized rate of 4.9% through 2009. The
industry is expected to contract in the five years through 2014, at a real average rate of 0.4%.
The uncertainty and volatility of global economic conditions poses a risk as consumers
and businesses may delay investments in technology and innovation in response to tighter credit,
negative financial news, or declines in current assets.
4
Economic difficulty could impact key suppliers resulting in product delays or potential
abandonment of product lines, unfinished goods in process and unusable inventory.
Global markets for high tech electronic devices are highly competitive and subject to
rapid technological change which when coupled with governmental factors can rapidly affect a
manufacturer’s operations and financial stability.
The ability of regulators to influence the timing of the introduction of new technologies
(such as the release of the 700 MHz bandwidth mentioned above) can create a situation where
technology becomes instantly obsolete thereby adversely affecting the supply chain and
disrupting the industry in general.
Porters Five Forces
Threat of New Entrants
Economies of Scale
The following graph illustrates the increasing average total assets in the industry, indicating that
economies of scale may exist. In the most recent five-year period, average assets have climbed
79% from 14,640 to 26,256.
Average Industry Total Assets from 2004 - 2008
The graph shown below displays that the average industry capital expenditures as a percentage of
sales has stayed pretty consistant until a 65% jump in 2008. Capital spending has roughly stayed
the same and if anything, has increased some in 2008. Economies of scale either do not exist
here, or the industry has already achieved economies.13
5
Average Industry Capital Expenditures as Percentage of Sales from 2004 - 2008
Looking at the cost of goods sold per employee, we see that the number is decreasing which
indicates that the unit costs of mobile devices are on the decline. Economies of scale do appear
to exist here as it is becoming less expensive to produce each device, making this industry appear
attractive and the threat of new entrants low.13
Average Cost of Goods Sold per Employee from 2004 – 2008
We can conclude from the analysis that economies of scale do exist and this represents a high
barrier to entry. Therefore, the industry is attractive.
Working Capital Requirements
The fixed costs to sales ratio is definitely on the lower side over the past five years. This means
that only a fifth of sales are contributing to fixed costs. This makes the industry unattractive, as
6
the threat of new entrants is high as many businesses would be willing to take the risk in this
industry with such low fixed costs.13 The annotation in the graph, ‘in millions’, is a typo.
Fixed Costs to Sales Ratio from 2004 – 2008
Proprietary Product Differences
Mobile phone manufacturers have the ability to create and use their own proprietary software
packages. This can create differences between manufacturers if one software platform is so
unique that it stands out among the rest. For example, the Apple iPhone uses Apple’s proprietary
software and the software is the primary selling point of that very popular phone. These types of
proprietary product differences can create a high barrier to entry. This causes a low threat of
new entrants and makes the industry attractive.14
Absolute Cost Advantages
Patents are abundant in the mobile device world. All key players in the industry hold various
patents, and continue to invest in intellectual property to stay competitive. The Apple iPhone is a
recent and a prime example of cost advantages through patent holding. Some companies have
managed to work around Apple’s iPhone patents, which attempt to protect their intellectual
property. However, Palm recently seems to have crossed the line with their most recent touch
screen device and will most likely feel pressure from Apple in coming months.7 Also last year
RIM and Motorola had disputes over RIM’s patent holdings, limiting Motorola’s development.6
These types of patents on the core technology around mobile devices constitute a high barrier to
entry, causing a low threat of new entrants and making the industry attractive.
Brand Identity
According to an employee of a major mobile device manufacturer, buyers currently offer phones
from each major mobile phone manufacturer, albeit not the same model for each customer.
Buyers are heavily influenced by what their customers (the end users) desire. End users tend to
lean toward brand loyalty in their mobile devices. End users have migrated toward RIM’s
Blackberry for business enterprise applications as an example, and have made it the standard in
7
business phone hardware. This end user dictates a lot of what the buyer (mobile network
provider) is interested in and causes them to make choices based on identity. This creates a high
barrier to entry and makes the industry attractive.14
Access to Distribution
Access to industry distribution is not a deterrent in the cellular phone industry. Distribution
channels include primarily shipping from the manufacturer to the mobile phone network provider,
along with specific retail outlets. This would make the industry unattractive because the barrier
is low and the threat is high.
Expected Retaliation
The existing software operating platforms dominated by Google and Microsoft do not pose a
significant retaliation as more phones utilizing those platforms would be welcome to the industry.
Chipsets are developed by multiple companies which do not exclusively manufacture for a given
cellular phone manufacturer. Motorola in the past did have some exclusivity in its chipset, not
making an exclusive arrangement between a chipset manufacturer and cell phone manufacturer
impossible. Retaliation could occur with exclusive agreements with component manufacturers;
however, at present the research team has identified none. It also does not appear that the current
manufacturers retaliate against newcomers to the industry in any concrete manner. The lack of
retaliation makes this industry attractive.14
Decision Matrix
Key Factors
Weights
Attractive
Economies of Scale
20%
X
Working Capital
Requirements
15%
Proprietary Product
Differences
15%
X
Absolute Cost Advantages
10%
X
Brand Identity
15%
X
Access to Distribution
15%
Expected Retaliation
10%
Unattractive
X
X
X
Attractive = 70%; Unattractive = 30%
8
Conclusion
The industry is attractive from an analysis of threat to new entrants when given the
weight of the economies of scale, proprietary product differences, absolute cost advantages,
brand identify, and expected retaliation. From the other side, the working capital requirements
show that fixed costs are low and this would make the industry inviting to potential competitors.
However, the economies of scale and absolute cost advantages are key areas that remain
attractive and predict future high barriers to entry.
Suppliers
Mobile Phones are made up of many parts that come from many different suppliers.
These parts can be grouped into three main categories: Software Platforms, Hardware Chipsets,
and Mechanical Parts. Software applications are a commodity, so they will not be discussed.1
Supplier Concentration
From reading this, the inputs are commodity items. I do not see anything that really gives
suppliers power. You should have jumped down to access to capital and labor.
There are only a few main software platforms available for the cell phone manufacturers to use.
They can develop and use their own proprietary software, in which they would be their own
supplier, thus no power struggle involved. The main non-proprietary software platforms
available are Google’s Android (a free open-source platform), Nokia’s Symbian, and Microsoft’s
Windows Mobile. Although limited in number, because of the recent availability of free opensource software platforms with the new Global Handset Alliance, the industry retains the power
from software platform suppliers.14
Unlike software platforms, there are quite a few hardware chipset suppliers. The main
ones include Broadcom, Qualcomm, Nokia, Texas Instruments, Infineon, and Ericsson. Since
chipset suppliers are not concentrated, the buyers have the power.8 & 9
There are many different mechanical parts that make up a mobile phone. Most of these
are commodity items like metal and plastic parts and need not be discussed. There are, however,
some parts that have only a few suppliers and some parts where there is only one supplier, such
as the display module, camera module, or flexible printed circuits. The buyers do not have the
power over these suppliers. If the parts suppliers for some reason become capacity constrained
or insolvent, it could result in an interruption in mobile phone manufacturing or increased
prices.1
Presence of Substitute Inputs
There are a variety of substitute inputs for the three main mobile phone parts. Since
buyers have the option of creating and using their own proprietary software, they do not have to
use a software platform from a supplier. Thus the buyers have the power over software platform
suppliers. The mobile phone must have a circuit board with a chipset, so there is no substitute
input for the chipset. Chipset suppliers have the power here. When it comes to the main
9
mechanical parts for which there are only one or a few suppliers (Display, Camera Module,
Speaker, etc.), these are central parts that make the mobile phone what it is. Therefore, there are
not substitute inputs for mobile phones that include these parts. Thus the suppliers of these parts
retain the power over the buyers.14
Importance of Volume to Supplier
Mobile phone software platforms, mobile phone chipsets, and mobile phone mechanical
parts are all created and designed to supply pretty much all of their product to the mobile phone
industry. Without this industry, these suppliers would not have substantial sales to keep them in
business. Thus the industry has the power.14
Impact of Inputs on our Cost or Ability to Differentiate
Suppliers of all three main cell phone components very much affect the manufacturers’
ability to differentiate. The overall end user experience is based on the software platform used.
Yes, the software can be customized to differentiate; however the “bones” of the software are the
same. The chipset provides the main functionality, memory, and processor for the mobile device.
The primary mechanical parts affect the look, feel, and sound quality of the device. All of these
areas can reflect back on the manufacturer and affect the final product. This gives the suppliers
power.14
Threat of Forward or Backward Integration
There does not currently seem to be a threat of forward or backward integration with the
suppliers in this industry. This does not put the suppliers in a position of power, making the
industry attractive.
Access to Capital
The profitability of this industry has been inconsistent from 2004 to 200827. The
industry is currently contracting as customers are not purchasing or upgrading to new mobile
devices. The industry had a history of profitability which peaked in 2006 and began declining in
2007. The effects of the current economic recession have not been fully captured, although the
recession was declared to have started in December of 2007. Because the industry profitability is
declining as inflation is increasing, debt financing is more difficult to obtain, giving power to the
suppliers, and making this industry less attractive. The following chart plots the Inflation rate
versus Industry Leaders Net Operating Margin.
10
Access to Labor
In the US, the cell phone manufacturing industry does not have unions. That is good for
the industry, as it keeps the power in the manufacturers’ hands. Research and development of
the mobile devices requires highly skilled engineers. If there were a shortage of skilled labor,
this would make the industry unattractive. However since the recent downturn of the economy,
labor of any kind appears to be plentiful to obtain since unemployment rates are so high. Most,
if not all, of the manufacturing is outsourced to third parties. These third parties use mostly
unskilled workers in assembly plants, and turnover is not a concern since new employees can be
quickly trained to work on the assembly line. The industry is attractive when it comes to access
to labor.14
Conclusion
11
The industry overall is attractive because the suppliers are not concentrated, the inputs
cannot be differentiated, the industry makes up the majority of the suppliers’ volume, there is no
threat of forward or backward integration, and there is easy access to labor.
Decision Matrix
Key Factors
Weight
Attractive
10%
X
Supplier Concentration
- Software Platforms
x
- Chipsets
x
- Mechanical Parts
Unattractive
x
Presence of Substitute Inputs
20%
- Software Platforms
X
x
- Chipsets
x
- Mechanical Parts
x
Differentiation of Inputs This subsection is no longer
required.
10%
X
- Software Platforms
x
- Chipsets
x
- Mechanical Parts
x
Importance of Volume to Supplier
20%
Impact of Inputs on our Cost or Ability to Differentiate
10%
Threat of Forward or Backward Integration
10%
Access to Capital
10%
Access to Labor
10%
X
X
X
X
X
Attractive = 60%, Unattractive = 40%
Buyers
Buyers in the mobile devices industry fall into two categories: Mobile carriers which
account for the large portion of purchasing, and third-party distributors and retailers.1
Buyer Concentration
12
The amount of buyers in the US is smaller than the amount of mobile device
manufacturers in the industry. Mobile carriers such as AT&T and Verizon Wireless are some of
the largest buyers followed by Sprint and T-Mobile. Retailers such as Best Buy, Wal-Mart, and
independent mobile device stores also sell these devices and represent a much smaller portion of
the industry’s distribution. US buyers are more concentrated than manufacturers and therefore
hold the power as almost all global mobile device manufacturers’ products are available to US
buyers. This makes the industry in fact seem unattractive due to this weakness.11, 12, and 13 A bit of
waffle here.
Buyer Switching Costs
Buyers such as mobile carriers do not normally experience large switching costs when
moving between manufacturers. The exception would be a situation such as the iPhone which is
exclusively available through the buyer AT&T. If AT&T were to drop the iPhone they would
most likely have a mass exodus of customers who would follow the iPhone to its new home,
creating revenue losses from mobile device purchases and wireless service purchases to utilize
their device. However, there are very few reasons this situation would normally happen as
AT&T would most likely do anything Apple asked, for example when they waived their
technical requirements for the iPhone in order to carry it. According to an employee with a
major mobile device manufacturer, buyers definitely are in a better position in most cases. Aside
from a breakout hit like the iPhone, devices that popular are few and far between. Since many
phones experience medium or low levels of popularity, buyers can at any time decide not to
purchase the phones if they are not selling well or if the manufacturer will not meet the buyer’s
technical requests. The industry does not have power over the buyers regarding switching costs
making it unattractive.14
Buyer Information
Buyers of mobile devices know what it takes to make a mobile device. The prices of key
components such as the chipset, software, and camera lens could be obtained within the industry.
Additionally, given that there are so many manufacturers of devices, it is possible to compare
phones with similar characteristics and use benchmarking to determine what it costs to make a
good phone. Buyers do have power over the industry in this regard as the knowledge of the costs
associated with mobile device production can be determined. This makes the industry
unattractive.
Threat of Backward Integration
Backward integration does not appear to be popular among mobile device buyers or
retailers and has not been attempted by any of the major companies such as Verizon or AT&T
successfully at this point. This does not put the buyers in a position of power, making the
industry attractive.
Pull Through
Pull through is definitely a part of this industry. Since brand identity is key to mobile
devices, pull through is quite evident. For example the Blackberry line by RIM Inc. has
essentially become a status symbol of the business executive and they would not want to be seen
on a LG Chocolate phone (marketed towards youth) typing emails. A large amount of marketing
13
expenses occur in most manufacturers such as the 13.5% that RIM spent in the past year pushing
their smart phones to the corporate world. Overall in the industry, mobile device advertising is
growing at about 45% per year and is currently at $3.1 billion annually.25 There is pull through,
and the industry has the power making it attractive.2 Ok, but you should have given a graph of
the trend over 5 years for the industry, and don’t talk raw numbers.
Brand Identity of Buyers
Brand identity does impact the buyers of mobile devices. Buyers are looking for devices
that appeal to all of the different segments of the population and for devices that will be
considered by the retail customers as desirable to be seen with and to utilize. The Apple iPhone
is not only trendy but the symbol of a young, tech-savvy, and even artistic generation. The
industry has the power making it attractive. .
Price Sensitivity
Buyers representing cell phone carriers are not extremely price sensitive to fluctuations in
the industry. Buyers’ ultimate goal is to make the $50 to $100 per month from the mobile
customer that they will pay for the network service, not so much the profit from the initial
purchase of the phone. These buyers are most likely going to eat the increased costs from a
manufacturer if they know a popular new phone will be coming out and it will increase their
cellular service customer base. This makes the buyer not very sensitive to changes and gives the
power to the industry, making it attractive.
Price to Total Purchases
For mobile providers, mobile device purchases represent a large portion of their inventory.
This is because without these devices getting to their customers, there would be nothing to utilize
the national networks they have setup for communications. Given that buyers depend on the
industry so heavily to keep it in business, the industry has power and is attractive.
Conclusion
Overall, buyers would not hold power over the industry. Therefore, the industry would be
attractive.
14
Decision Matrix
Key Factors
Weight
Attractive
Unattractive
Buyer Concentration
15%
X
Buyer Switching costs
10%
X
Buyer Information
5%
X
Threat of Backward Integration
5%
X
Pull Through
20%
X
Brand Identity of Buyers
25%
X
Price Sensitivity
10%
X
Price to Total Purchases
15%
X
Attractive = 70%, Unattractive = 30%
Threat of Substitutes
Technology currently exists which performs each independent function of a mobile
phone; however, a handheld netbook computer (Acer Asus) or notebook computer (multiple
brands) is currently the only device capable of performing all functions currently available on a
mobile phone. The devices are very similar except for size. Functionality and capacity of a
netbook or notebook is generally higher whereas portability of a mobile phone is generally
greater10. Streaming data access improvements to online or on network storage has made the
capacity issue less problematic for mobile phones.
GPS positioning is available in a single device (e.g. Garmin, TomTom, etc…), which
can be utilized without dependence on a cellular carrier network. If the end user only desires
GPS functionality then this could have an adverse affect on sales.
Scheduling and organizing software currently exists on many handheld devices (e.g.
Palm, HP iPaq) which are independent of a wireless carrier. This also could adversely affect
sales.
Radio devices exist for communication, which operate independently of wireless carriers
for local limited communications. The range consideration defines this substitute.
All in all, the threat of substitutes does not seem great enough to make the industry
unattractive. The majority of people are moving toward one device that can do it all, so the
existing substitutes are posing less of a threat as this move is made.
Rivalry
15
Degree of Concentration and Balance among Competitors
The mobile device industry in the US currently has six major firms that total 88% of the market
share. Five or less of these firms represent 82% of the market which surpasses the 60% mark
and indicates that concentration exists. Both Samsung and Motorola have market shares within
10 percentage points of each other which results in a balanced industry, as these are the two
largest players currently. The industry is balanced and concentrated with a high level of rivalry
and is therefore unattractive.15
Pie Chart of Current US Mobile Device Market Share
Diversity among Competitors
While all firms have decided to focus on either traditional mobile phones and/or smart phones,
the one strategy that is evident across all firms is the development of the smart phone. A quick
trip to the web store of any of the five largest firms in the industry will show that each offers
some type of smart phone with internet and email capability. Firms such as RIM and Apple have
decided to strictly focus on smart phones that require data plans with most mobile carriers.
Samsung, LG, Nokia and Motorola continue to offer devices marketed towards both arenas as
more of the population can’t afford a $30-$50 additional data charge to their monthly bill at this
point. The bottom line is that each firm has a flagship smart phone that is leading the way as
well as requiring heavy R&D financial commitments, as the traditional mobile device will slowly
become less popular in the coming decade. All of the largest firms also market towards the
mobile providers as well as third-party retail outlets as there is currently no benefit to staying out
of these distribution lines.1 & 16
Since all firms are following very similar strategies and no large niches exist, the level of rivalry
is high as they fight for the same markets. This makes the industry unattractive in its current
state.
Industry Growth Rate (Past & Projected)
16
The graph below shows the industry growth of mobile device users from 1985 to 2008, and then
uses projections based on industry analysis for the coming years through 2013.17
Industry Growth of Mobile Device Users from 1985 to 2013
2009 will most likely mark the first year of a decline in the need of mobile devices with a
10% drop in consumption. This has been attributed to the current economic crisis as well as the
saturation of the market as the 76% of the population now own a mobile device. Once we enter
2010, growth is expected to pick back up again in the mid-single digits with an average of 5%
growth per year through 2013. With the current inflation rate averaging around 3%, this
indicates that the industry growth rate will be higher and firms will continue to increase market
share without taking it away from other firms in the industry. Because of this, rivalry is reduced
and the industry becomes attractive.1 & 18
Fixed Costs / Value Added
When considering fixed costs and EBITDA, it is evident that the fixed costs have generally
followed the same trend as EBITDA when we examined a five year average of the industry.
Fixed costs are starting to get higher which points towards the conclusion that economies of
scale may exist (see Threat of New Entrants section – economies of scale). An EBITDA that is
positive means that a profit is being made within the industry.13
The following data shows that the ratios of EBITDA and the fixed costs ratios appear to
be somewhat similar but have started to take a different turn in the last two years. Fixed costs
have stayed the same while EBITDA has plummeted and only represents 7.43% of the total sales.
17
After the industry’s first year of decline expected in 2009, it will pick back up and increase a
minimum of 5% in the foreseeable future. The fixed cost ratio will decrease since sales will
increase, while the EBITDA will increase due to sales as well.13 (see New Entrants Section for
more detail)
EBITDA and Fixed Costs Margin Trend from 2004 to 2008
While fixed costs are increasing along with value added, this most likely means that
economies of scale are possible within the industry. Since value added is not particularly low
and the positive future projections will help its ratio to sales, the data agrees with the known fact
that mobile devices are not commodities yet. Rivalry does not increase and is moderate, making
the industry attractive.13
18
Intermittent Overcapacity
The following chart shows the current capacity utilization for Communications Equipment (ref):
Capacity Utilization: January 1996 – June 2009
The current trend is toward lower capacity utilization which is seen by the 2009 rate of
65%. The lower utilization which does not meet the 80% normal range means that the industry
is susceptible to intermittent overcapacity. This increases rivalry and makes the industry
unattractive.19
Growth of Foreign Competition
As the table below shows, only two of the top six global market share leaders in the mobile
phone industry are US based companies (Apple and Motorola). This clearly shows that foreign
firms can easily penetrate the US market. These two US firms hold 5.7% and 21.10% of the
global market share, indicating that US firms are competitive in the global marketplace.
However, global firms hold four of the six top spots in total US market share for a combined
total of 62%. Time will tell if the US companies will gain significant market share to be top
competitors but this will not happen anytime soon. Global firms appear to easily penetrate the
US market and rivalry is increasing making the industry unattractive.26
19
Company
2008 Global
Market Share
Samsung
22.40%
LG
20.50%
Motorola
(US)
21.10%
RIM
10.20%
Nokia
8.40%
Apple (US)
5.70%
Other
11.70%
Corporate Stakes
The firms in the industry are not universal in their dependence on a single industry
segment for their revenue. Nokia, the largest global retailer of cellular phones is not diversified
and depends entirely on sales of cellular phones for revenue. Motorola is more diversified in
providing other types of communications equipment to enterprises. Research in Motion, the
maker of Blackberry is entirely dependent on cellular phone sales. Palm is split into two
divisions for its revenue: handheld devices and cellular phones. Apple is the most diversified
and involved in computers, handheld electronics, and cellular phones just to name a few areas.
The aggregate conclusion is the revenue is highly dependent on the mobile device industry for
each firm. This creates an increase in rivalry and makes the industry unattractive.
Exit Barriers
Mergers are not common among the top players in the mobile phone manufacturing
industry that serves the US; however, that does not mean it wouldn’t ever happen. In 2008,
Motorola considered selling off its mobile phone division, but the sale was never finalized. 20
Also, Japanese firms Casio, Hitachi, and NEC recently merged in order to cut costs and become
more competitive.21 However, no mergers have taken place in the US and there is currently no
indication that one will.
Converting operations to another product/service seems unlikely due to the technical
nature of this industry and how specific it is to one main product. Exit barriers appear somewhat
high based on the high costs involved with getting out of this industry. This increases rivalry and
makes the industry unattractive.
Decision Matrix
20
Key Factors
Weight
Attractive
Unattractive
Degree of Concentration and Balance Among
Competitors
10%
X
Diversity Among Competitors
5%
X
Industry Growth Rate
25%
X
Fixed Costs to Value-Added
20%
X
Intermittent Overcapacity
5%
X
Growth of Foreign Competition
20%
X
Corporate Stakes
10%
X
Exit Barriers
5%
X
Attractive = 45%, Unattractive 55%
Conclusion
The industry is unattractive mainly because of the concentration and balance among
competitors, the diversity among competitors, overcapacity, the growth of foreign competition,
corporate stakes, and exit barriers. Even though many more categories are unattractive than
attractive, the weights are only separated by 10% meaning that it was a close race.
Conclusion
Critical Success Factors
Socio-economic Forces - Standardization of communication protocols in the industry are a
significant hurdle. While these hurdles affect all companies in the industry; a successful
company will need to comply with the Interoperability Group for standardization.
Economies of Scale, Product Differentiation and Brand Identity - The ability for a company
to achieve economies of scale quickly is important for success in this industry. A company must
quickly differentiate itself with proprietary software and establish brand identity in the mobile
device segment.
Presence of Substitute Inputs and Importance of Volume to Suppliers – Entrants in the
mobile device industry must be aware of the supplier power with the chipset and circuit boards.
Establishing positive forward looking relationships with these suppliers is important for success
and weighted heavily in the analysis. The importance of volume to suppliers, whose business
would not be sustainable otherwise, is important in balancing the relationship which must be
established for both buyer and supplier to be successful.
Brand Identity, Pull Through, and Price Sensitivity – Establishing very quickly Brand
Identity is a key success factor in this industry and subsequently pull through. This will lead to
21
tolerance in price sensitivity with buyers which will be necessary to maintain profitability and
further innovation.
Growth of Foreign Competition and Industry Growth Rate – Surveillance of the industry
growth rate is key to responding to changes within this industry. The climate exists where
foreign competition can easily usurp market share and most be monitored to insure competitive
advantage in technology, brand identity, and pricing.
Apparently you didn’t understand what was expected here. Only 2 or 3 CSFs. CSFs are those factors that
can be used to predict success or failure. What you have here is more of a list. Now, which are truly
critical? Since economies exist, I would suggest efficiency. Since brand identity is important, that can be
another. Then, reading between the lines, R&D would be a 3rd. You have to fix this before doing the firm
paper.
Prognosis
The following Table summarizes the decision matrices for the industry utilizing Porter’s strategy.
Key Factors
Attractive
Unattractive
Threat of New Entrants
70
30
Suppliers
60
40
Buyers
70
30
Substitute products
100
0
Rivalry
45
55
Total
345
155
Attractive = 69%, Unattractive = 31%
According to our decision matrix, the mobile phone industry is attractive to enter.
However, the firms have to be cautious about suppliers with respect to presence of substitute
inputs, impact of inputs on the cost or ability to differentiate, and access to Capital; and very
cautious of rivalry with respect to growth of foreign competition, corporate stakes, and degree of
concentration.
Prognosis for this industry is fair. The future growth for this industry is demonstrated by
the industry growth rate, the price sensitivity, potential economies of scale, and the importance
of volume to suppliers.
This industry has high barriers to entry; therefore, there will be fewer firms willing to
enter. Consequently, most of the market is dominated domestically by approximately 5 large
companies. Due to absolute cost advantage due to patents and intellectual property, working
capital requirements where only one fifth of sales are contributing to fixed costs, and economies
of scale that allow production of each device to occur at a lower cost, the industry is attractive to
enter.
22
The industry has very little impact of substitutes because by definition, the desired
characteristic is mobility and functionality. This makes the industry very attractive.
The mobile phone industry has significant attractiveness in its power over suppliers. The
supplier concentration, the differentiation of inputs, the importance of volume to suppliers, and
the access to labor contributed significantly to the attractiveness.
In evaluating buyers in the industry, the industry again appears attractive due to the lack
of threat in backward integration, the presence of pull through, the brand identity of buyers, the
price sensitivity, and the price to total purchases.
The mobile phone industry does have a balance in rivalry. The industry is unattractive
because of the degree of concentration, the diversity among competitors, the presence of
intermittent capacity, the growth of foreign competition, the corporate stakes present, and the
exit barriers that exist. The industry is attractive with a great industry growth rate and fixed costs
to value added presence. The current climate of rivalry made the industry unattractive.
This analysis concludes that the industry is attractive if the critical success factors are
kept in focus and balanced against the unattractive aspects of the industry.
23
Bibliography
1. Motorola, Inc. “2008 Annual Report.” Motorola.com March 2009. 9 September 2009
https://materials.proxyvote.com/Approved/620076/20090309/AR_36099/images/Motorola_Inc_
AR2008.pdf
2. RIM, Inc. “2009 Annual Report.” Rim.com March 2009. 9 September 2009
http://www.rim.com/investors/pdf/RIM09AR_FINAL.pdf
3. Apple, Inc. “2008 10-K Report.” Corporate-ir.net October 2008. 9 September 2009
http://library.corporate-ir.net/library/10/107/107357/items/315133/AAPL_10K_FY08.pdf
4. Nokia, Inc. “2008 Annual Report.” Nokia.com March 2009. 9 September 2009
http://www.nokia.com/NOKIA_COM_1/About_Nokia/Sidebars_new_concept/Annual_Accounts
_2008/Nokia_in_2008.pdf
5. Palm, Inc. “2009 Annual Report.” Shareholder.com June 2009. 9 September 2009
http://files.shareholder.com/downloads/PALM/722535900x0x302996/fc5f86a8-8a30-4c60-93ca347e9d3797b9/PalmReportsQ4AndFY09Results.pdf
6. Retrieved September 29, 2009 from the World Wide Web:
http://www.dslreports.com/shownews/RIM-Sues-Motorola-Over-Patent-Abuse-91963
7. Retrieved September 29, 2009 from the World Wide Web:
http://brainstormtech.blogs.fortune.cnn.com/2009/01/27/apple-awarded-iphone-patent/
8. Retrieved September 24, 2009 from the World Wide Web:
http://www.reuters.com/article/technologyNews/idUSSEO16932520080527
9. Retrieved September 24, 2009 from the World Wide Web:
http://finance.yahoo.com/q/co?s=QCOM
10. Retrieved September 20, 2009 from the World Wide Web:
http://windowsitpro.com/article/articleid/101092/netbooks-can-they-bridge-the-gap-betweenmobile-phone-and-notebook.html
11. Retrieved September 22, 2009 from the World Wide Web:
http://en.wikipedia.org/wiki/List_of_mobile_network_operators
12. Retrieved September 22, 2009 from the World Wide Web:
http://cellphones.about.com/od/phonemakers/All_Cell_Phones_Sorted_By_Manufacturer
s.htm
13. Research Insight. Retrieved September and October 2009.
14. Davis, Lindsey. Personal Interview. Multiple times through September and October 2009.
15. Retrieved September 30, 2009 from the World Wide Web:
http://www.informationweek.com/news/mobility/business/showArticle.jhtml?articleID=2120013
04
24
16. Retrieved September 30, 2009 from the World Wide Web:
http://www.motorola.com/Consumers/US-EN/Home
17. Retrieved October 1, 2009 from the World Wide Web:
http://www.infoplease.com/ipa/A0933563.html
18. Retrieved October 1, 2009 from the World Wide Web: http://www.itu.int/ITUD/ICTEYE/Reports.aspx#
19. Retrieved September 16, 2009 from the World Wide Web:
http://www.federalreserve.gov/pubs/bulletin/2009/pdf/Industrial09.pdf
20. Retrieved October 1, 2009 from the World Wide Web:
http://www.newser.com/story/17880/motorola-may-sell-ailing-cell-phone-division.html
21. Retrieved October 1, 2009 from the World Wide Web:
http://www.mobilemarketingnews.co.uk/Japanese_Mobile_Phone_Groups_Announce_Merger_3
9144056609.html
22. Retrieved September 16, 2009 from the World Wide Web:
http://en.wikipedia.org/wiki/Mobile_phone
23. Retrieved September 16, 2009 from the World Wide Web:
http://en.wikipedia.org/wiki/United_States_2008_wireless_spectrum_auction
24. Retrieved October 5, 2009 from the World Wide Web:
http://www.mobiledia.com/news/30541.html
25. Retrieved October 5, 2009 from the World Wide Web:
http://www.reuters.com/article/technologyNews/idUSTRE55S2FY20090629
26. Retrieved October 1, 2009 from the World Wide Web:
http://www.informationweek.com/news/mobility/business/showArticle.jhtml?articleID=2
12001304
27. Retrieved September23, 2009 from the World Wide Web:
http://quicktake.morningstar.com/StockNet/Profitability10.aspx?
Appendices
Mobile Device Industry Ratios
Year ended:
2004
2005
2006
2007
2008
Current Ratio
2.25
2.71
2.31
1.87
1.72
Quick Ratio
1.91
2.21
1.90
1.47
1.33
Inventory Turnover
9.25
12.30
14.71
16.26
17.95
25
Receivables Turnover
5.05
6.29
7.03
7.08
6.48
Total Asset Turnover
0.71
0.88
1.02
1.12
1.14
47.01
46.31
51.18
56.75
57.46
Net Profit Margin (%)
8.46
14.48
10.54
8.38
-14.76
Return on Assets (%)
7.96
15.96
12.63
9.35
-17.34
Return on Equity (%)
13.32
25.70
21.08
1.02
9.66
Return on Investment (%)
12.28
24.55
20.51
16.57
-44.06
Long-Term Debt/Common Equity (%)
10.21
7.78
5.53
95.57
-15.04
5.53
4.09
4.33
12.42
29.17
Average Collection Period (Days)
Total Debt/Total Assets (%)
Other Relevant Indices
Information on the five companies we studied
Nokia
The company is the world's #1 maker of cell phones. The company's business is divided
primarily between three divisions: devices and services (mobile device manufacturing and
multimedia internet services) and NAVTEQ (digital map data and content). Nokia's wireless
network products business is operated in partnership with Munich-based Siemens as Nokia
26
Siemens Networks; the joint venture is the #3 player in the wireless networking equipment
market, behind Ericsson and Alcatel-Lucent.
Company Type
Public - NYSE: NOK; OMX Helsinki: NOK1V
Main Headquarters
Fiscal Year-End
December
2008 Sales (mil.)
$71,475.7
2008 Employees
125,829
Nokia Income Statement
2008
2007
2006
Revenue ($ mil.)
71,475.7
75,152.3
54,250.9
Gross Profit ($ mil.)
24,487.2
25,469.8
17,650.9
Operating Income ($ mil.)
7,266.0
12,233.1
7,579.4
Total Net Income ($ mil.)
5,621.1
10,605.0
5,680.9
Diluted EPS (Net Income)
1.48
2.69
1.39
Company
Industry
Median
Market
Median1
Price/Sales Ratio
0.76
1.44
6.88
Price/Earnings Ratio
9.76
(51.02)
25.00
Price/Book Ratio
3.04
2.53
6.62
12.11
13.95
42.73
Nokia Financial Ratios
Price/Cash Flow Ratio
Headquarters
Keilalahdentie 2-4
Fl-02150 Espoo, Finland
Key Executive Officers
Chairman
Jorma Ollila
Network | E-mail
27
President, CEO, and Director
Olli-Pekka Kallasvuo
Network | E-mail
EVP and CFO
Richard A. (Rick) Simonson
Network | E-mail
Motorola
The company is the #3 manufacturer of wireless telephone handsets. It also sells wireless
network infrastructure equipment such as cellular transmission base stations and signal
amplifiers. Motorola's home and broadcast network products include set-top boxes, digital video
recorders, and network equipment used to enable video broadcasting, IP telephony, and high-def
television. Its products for business and government customers consist mainly of wireless voice
and broadband data systems used to build private networks and public safety communications
systems.
Company Type
Public - NYSE: MOT
Main Headquarters
Fiscal Year-End
December
2008 Sales (mil.)
$30,146.0
2008 Employees
64,000
Motorola, Inc. Income Statement
2008
2007
2006
30,146.0
36,622.0
42,879.0
8,395.0
9,952.0
12,727.0
Operating Income ($ mil.)
(2,413.0)
(25.0)
4,945.0
Total Net Income ($ mil.)
(4,244.0)
(49.0)
3,661.0
Diluted EPS (Net Income)
(1.87)
(0.02)
1.46
Company
Industry
Median
Market
Median1
0.73
1.44
6.88
Revenue ($ mil.)
Gross Profit ($ mil.)
Motorola Key Financial Ratios
Price/Sales Ratio
28
Price/Earnings Ratio
Price/Book Ratio
Price/Cash Flow Ratio
(4.29)
(51.02)
25.00
1.95
2.53
6.62
(38.31)
13.95
42.73
Headquarters:
1303 E. Algonquin Rd.
Schaumburg, IL 60196
United States
Motorola Key Executive Officers
Title
Name & Bio
Contact
Chairman
David W. Dorman
Network | E-mail
President, Co-CEO, and Director; CEO, Broadband
Mobility Solutions
Gregory Q. (Greg)
Brown
Network | E-mail
Co-CEO and Director; CEO, Mobile Devices
Sanjay K. Jha
Network | E-mail
Apple, Inc.
Apple’s entry into the cellular phone market has been the iPhone. Sales of the iPhone have made
Apple a major player in the cellular telephone industry.
Company Type
Public - NASDAQ (GS): AAPL
Main Headquarters
Fiscal Year-End
September
2008 Sales (mil.)
$32,479.0
2008 Employees
35,100
Apple, Inc. Income Statement
2008
2007
2006
Revenue ($ mil.)
32,479.0
24,006.0
19,315.0
Gross Profit ($ mil.)
11,145.0
8,154.0
5,598.0
--
--
--
Operating Income ($ mil.)
29
Total Net Income ($ mil.)
4,834.0
3,496.0
1,989.0
Diluted EPS (Net Income)
5.36
3.93
2.27
Company
Industry
Median
Market
Median1
4.77
2.19
6.88
31.85
28.57
25.00
6.31
6.50
6.62
14.56
15.15
42.73
Apple, Inc. Key Financial Ratios
Price/Sales Ratio
Price/Earnings Ratio
Price/Book Ratio
Price/Cash Flow Ratio
Headquarters:
1 Infinite Loop
Cupertino, CA 95014
United States
Apple Key Executive Officers
Title
Name & Bio
Contact
Chairman
William V. (Bill) Campbell
Network | E-mail
COO
Timothy D. (Tim) Cook
Network | E-mail
CEO and Director
Steven P. (Steve) Jobs
Network | E-mail
Research in Motion (RIM)
The company provides wireless hardware, software, and services to customers worldwide. Its
popular line of BlackBerry smart phones handle voice, e-mail, and text message communications,
as well as Internet access and multimedia applications. RIM also provides software development
tools and makes radio-based modems that other manufacturers incorporate into portable devices.
The company sells to corporations, resellers, and wireless carriers. BlackBerry devices are
offered by service providers including AT&T Mobility, T-Mobile, and Verizon Wireless.
Company Type
Public - NASDAQ (GS): RIMM; Toronto: RIM
Main Headquarters
30
Fiscal Year-End
February
2009 Sales (mil.)
$11,065.2
2009 Employees
8,387
RIM Income Statement
2009
2008
2007
11,065.2
6,009.4
3,037.1
5,097.3
3,080.6
1,657.8
Operating Income ($ mil.)
--
--
--
Total Net Income ($ mil.)
1,892.6
1,293.9
631.6
Diluted EPS (Net Income)
3.30
2.26
1.10
Revenue ($ mil.)
Gross Profit ($ mil.)
RIM Financial Ratios
Price/Sales Ratio
Price/Earnings Ratio
Price/Book Ratio
Price/Cash Flow Ratio
Company
Industry
Median
Market
Median1
3.23
1.92
6.88
19.27
36.23
25.00
6.02
2.73
6.62
19.19
6.14
42.73
Headquarters:
295 Phillip St.
Waterloo, Ontario N2L 3W8, Canada
RIM Key Executive Officers
Co-CEO and Director
James L. (Jim) Balsillie
Network | E-mail
President, Co-CEO, and Director
Michael (Mike) Lazaridis
Network | E-mail
COO, Administration and Operations
Dennis Kavelman
Network | E-mail
31
Palm
Historically the leading provider of handheld computers, the company now primarily markets
Internet-enabled mobile phones (also known as smart phones). Its phone line includes the entrylevel Centro and more advanced Treo and Pre lines. The company sells its products directly and
through distributors, wireless service carriers, retailers, and resellers. Its carrier partners include
AT&T, Sprint Nextel, and Verizon Wireless. The company markets its products globally;
however, the majority of its revenue comes from sales in the US. Palm traces its roots back to
1992.
Company Type
Public - NASDAQ (GS): PALM
Main Headquarters
Fiscal Year-End
May
2009 Sales (mil.)
$735.9
2009 Employees
939
Palm Income Statement
2009
2008
2007
Revenue ($ mil.)
735.9
1,318.7
1,560.5
Gross Profit ($ mil.)
159.8
401.9
575.1
Operating Income ($ mil.)
(302.6)
(137.8)
--
Total Net Income ($ mil.)
(732.2)
(105.4)
56.4
Diluted EPS (Net Income)
(6.51)
(1.05)
0.54
Palm Key Financial Ratios
Company
Industry
Median
Market
Median1
4.64
2.19
6.88
Price/Earnings Ratio
(2.38)
28.57
25.00
Price/Book Ratio
(3.15)
6.50
6.62
Price/Cash Flow Ratio
(8.82)
15.15
42.73
Price/Sales Ratio
32
Headquarters:
950 W. Maude Ave.
Sunnyvale, CA 94085
United States (Map)
Palm Key Executive Officers
Title
Name & Bio
Contact
Chairman and CEO
Jonathan (Jon) Rubinstein
Network | E-mail
SVP and CFO
Douglas C. (Doug) Jeffries
Network | E-mail
SVP Worldwide Sales
David (Dave) Whalen
Network | E-mail
33