Smart Phone Industry Globalization Assessment

Research Paper – Part I

Smartphone Industry Globalization Assessment

IMAN 601 – Smartphone Industry Globalization Assessment

INDUSTRY STRUCTURE

The smartphone industry is a rapidly growing and highly competitive one where different

business models and technologies battle for global dominance. This section will discuss Apple’s

role in this industry, as well as the industry’s global structure.

Apple and the Smartphone Industry

After having established themselves as dominant or early entry players in their home

countries, many have expanded globally to compete in markets where technological innovation

dominates. Apple, Inc. is now one of those global competitors whose brand is recognized

globally.

Apple, Inc.

Apple started out as a company that had nearly been wiped out of the PC market by

Microsoft Windows. While Apple may be a niche PC player, through innovation and merging

form and function, Apple has influenced and become a powerhouse of the smartphone industry.

Apple’s first smartphone, the iPhone, had its genesis in the Newton message pad. Steve Jobs did

not think the future for PDAs was good, but he thought that the mobile phone has an excellent

feature and the first iPhone, in 2007, was the effective merger of the two.

Apple is the stylistic and innovation leader in smartphones. Apple was listed as world’s

most innovative company for both FastCompany (2011) and Bloomberg BusinessWeek (2010)

magazines. Apple is considered to have taken consumer electronics from primarily being

functional to merging form and function together in a manner that has created a loyal following

among its customers. The smartphone market is growing four times the rate of the overall

mobile phone market, as it continues to erode the presence and strength of land line

telecommunications companies. The top 10 manufacturers of smartphones account for two-

2


thirds of all units sold. Despite that concentration of market share, there are many other

manufacturers who are emerging, especially in China, and soon, India. Plus, the top companies

continue to seek unit sales growth, even in the face of stiff competition. The top manufacturers

are primarily located in Asia and North America with the notable exception of Nokia, which is

based in Finland.

Apple primarily designs its iPhones in the United States, but components are

manufactured in the U.S. and Asia, while assembly occurs in Asia. Some of its competitors,

such as Nokia, are much more vertically integrated. Apple’s business model revolves around

premium pricing and, as a result, one of its strategies has been to open Apple branded retail

outlets to profit not only from wholesale pricing but from retail channel markups.

Most of its competitors compete on price. Overall, the industry is moderately profitable,

although Apple accounts for half of industry profit. Google has staked its future profitability not

on the smartphones themselves, but on the operating system. So it has introduced an open source

operating system in the hopes of controlling the application marketplace, analogous with

Microsoft’s strategy for PCs. Apple keeps tight proprietary control over access to iOS, but it still

has managed to reach 10 billion app downloads since the introduction of the iPhone.

The industry does not have excess capacity at this point in time due to tremendous

growth that further fuels economies of scale in production. Smartphones are almost everywhere,

although they do require a wireless network that can handle a large amount of data.

Most importantly, smartphone competition is increasing due to the convergence of

functionality in the phones, along with wireless service providers (especially in the U.S.) allow

any phone on their network that uses their communication protocols. Therefore, the cost of

switching phones is relatively low. Largely, as smartphones have gotten better technologically,

3


the price in real terms is about the same or lower than earlier generations of mobile phones and

their technological convergence with computing and internet access make them an attractive

device in parts of the world where the PC penetration is relatively low.

Industry Characteristics

Until recently, the mobile phone industry was simply viewed as a monolithic industry

with a few subcategories. Now, the mobile phone industry is split into traditional cell phones

and smartphones. The smartphone is an evolution of technology that represents the law of

increasing degree of ideality (Fey and Rivin, 2005) in technological innovation, where the

product involves an increase in functionality, while the costs of production decreases. The

industry began to globalize driven by the declining price of service and equipment, as well as

improvements in global supply chain systems.

Global Structure of Smartphone Industry

Smartphone manufacturers are competing across the globe with numerous models to

choose from at different price and quality points. The key characteristics of smartphones, which

will help in understanding why the degree of globalization has occurred in the industry,

according to the TechPluto web site (2010), are a mobile operating system; web-capable;

enhanced hardware, such as digital cameras, or touch screens; mobile processor; technology

support for new telecommunication standards. There are many influences on the global

competitive structure of the smartphone industry with the primary factors being markets,

competition, production and procurement.

Markets

The big markets in size for smartphones are the United States, Western Europe and Asia.

The United States and Europe are substantial markets because smartphone growth is still

4


significant and, economically, they are able to afford the premium prices for smartphones over

standard phones. The big markets for growth in smartphone sales are China, Russia and India.

According to telecommunications equipment equity analyst, Mike Ambrasky (2009), those

countries experienced smartphone sales growth rates of 45%, 24% and 122%, respectively.

China, the U.S. and Western Europe will continue to be the largest markets with

competitive emphasis being placed on China due to its market size and growth prospects, and the

U.S. because of its market size and affinity for smart phones. Emerging markets may be

important for economies of scale, but China and the U.S. will be important for profitability.

Competition

Smartphone competition is measured based the mobile operating system used and unit

sales by manufacturers. According to Canalys (2011), the top four operating systems,

comprising 94% of 4Q 2010 shipments, are Android (Google), Symbian (Nokia), iOS (Apple),

and BlackBerry (Research in Motion). With the exception of Symbian and BlackBerry, most of

the intellectual property associated with mobile phone operating systems are U.S.-based. The

top sellers of smartphones, according to Gartner, Inc. (2010), are presented in the table on the

following page (in thousands of units).

5


Company Country 3Q10 Units

Nokia Finland 117,461.00Samsung South Korea 71,671.80LG South Korea 27,478.70Apple United States 13,484.40Research In Motion Canada 11,908.30Sony Ericsson Japan/Sweden 10,346.50Motorola United States 8,961.40HTC Taiwan 6,494.30ZTE China 6,003.60Huawei Technologies China 5,478.10Others - 137,797.60

Total 417,085.70

Lower price smartphones, which the Android OS dominates, are primarily competed on

by price in Europe, Middle East and Africa. Most of the leading manufacturers are conglomerate

organizations that sell products other than cell phones. Regardless of the units sold or operating

system used, Apple accounted for 50% of the industry’s profit on approximately 4% market

share in 4Q 2010 (Wagner, 2011).

Production

Manufacturing occurs on a global basis. Nokia has nine production facilities – three each

in Asia, Europe and North America. Global procurement is nearly the de facto standard for

smartphones. As the largest market, there are no assembly plants in the United States.

While components may be obtained from companies all over the developed world,

assembly usually occurs in Asia, North America or Europe. Most of the leading manufacturers

have office or facilities in China due to their desire to serve that market, but none, other than the

China-based companies have a significant portion of their capacity in China, although that may

change depending on market opportunities and government policies.

6


Procurement

The first Apple iPhone will be used as an example of global procurement for

smartphones, which incorporate dozens of technologies that no one nation has a monopoly on

(www.texyt.com, 2007). The table below lists the component, where it is sourced from and how

strategic it is to the product.

Component Supplier & Location Strategic ImportanceFlash chip memory Intel – U.S. High – holds iPhone softwareVideo processor IC Samsung – Korea HighDisplay Sharp & Sanyo Epson – Japan HighTouch sensitive modules in LCD Balda AG – Germany High – multi-touch control featureScratch resistant glass screen Balda AG – Germany Moderate – iPod Nano complaintBluetooth module Cambridge Silicon Radio – U.K. ModerateWiFi chip Marvell – U.S. ModerateInterface chip for multi-touch Broadcom – U.S. HighStainless steel iPhone case Catcher Technology – Taiwan LowCircuit boards Unimicron Technology Corp. High – brings components together

Design and intellectual property of these components reside in the global headquarters of

many of these companies, but most of the components are actually manufactured in some part of

Asia, where Taiwan is the global leader in chip production.

How the Key Factors Shape the Structure of the Industry

The factors above that help describe the degree of globalization in the smartphone

industry will also shape how the industry changes in the future. The U.S., Asia and Europe will

continue to be targeted for all price and quality points for smartphones and the low cost

smartphone providers will continue to make inroads on the growth in Eastern Europe, the Middle

East and Africa. Technology innovations, style and design features are occurring primarily in

North America and Japan, so the latest and greatest products are usually released there.

The competition is still largely from the same regions with the addition of the Chinese

manufacturers and, given the potential size of that market, it is expected that more indigenous

companies will emerge for a share of that growing pie. There is a growing amount of

7

http://www.texyt.com/


competition at the level of component suppliers, which, depending on the outcome will diversify

the location of component production, but will otherwise keep the manufacturers in strong

position. However, many of the challengers come from the same countries as existing vendors,

so they will be able to quickly plug into the logistical supply chain. There may be further

production diversification if other lower wage countries attain greater political stability. Given

the long lead times for new manufacturing plant, stability is a key consideration in locating

facilities.

Challenges to Globalization

Some of the challenges for the industry include countries without modern

telecommunications infrastructure, concentration of needed technologies in a handful of

countries, maximizing first user usability and experience, attempts at platform control, and lack

of a global technology standard.

Target Market Infrastructure

Both the infrastructure for component suppliers and end users for smartphones are

unevenly developed around the globe. Some nations’ telecommunications systems are not

compatible with 3G and 4G smartphones. The industry is working on even more advanced

phone and attempts to improve data delivery speed will spur further innovation. These nations

may never have catch up without outside help.

Concentration of Needed Technologies

The infrastructure for components suppliers are also unevenly developed around the

globe. This limits the potential number of potential suppliers because it will be difficult for one

to develop a tenable cost advantage over another if they operate in the same country in the same

labor pool.

8


Maximizing First User Usability and Experience

Although the population of savvy smartphone users is significant, improving the

experience of first users, either elderly or underdeveloped is important. While the manufacturer

has no control over the quality of service by the service vendor, it does have control over how

easy their products are to use. That is one of the hopes for the Android OS. Even low end

smartphones are pricey compared to traditional mobile phones.

Platform Control

One of the reasons that the U.S. mobile phone market was not a place of innovation is

that the service providers would dictate to the manufacturers what they would and wouldn’t

allow on their networks. Apple’s agreement with AT&T on exclusivity was meant to give Apple

freedom with design and technology. Elsewhere, users can use any phone on any network. At

the phone level, Apple is attempting to control its platform as its business model. That requires

developers making bets on the future of iOS and Apple’s support of it.

Lack of a Global Technology Standard

For a period of time, GSM was the dominant 2G standard around the world, except for

the U.S. Japan then leapt ahead of the world with 3G and 4G technology standards. Now,

mobile phone service providers are now running networks that are a combination of 2nd, 3rd and

4th generation mobile phone communication standards. This will limit consumer choice and

retard growth in the industry.

Global Logic

The logic that drives Apple and its competitors to the global scale is that smartphone

technology is able to quickly cross cultural and language boundaries because it can meet many

different needs with the same functionality. Like automobiles, smartphones only need the

9


supporting infrastructure of wireless networks, whose equipment can be purchased from almost

any part of the world, especially between Asia, North America and Europe. Entering the

smartphone industry is a capital intensive venture that quickly directs its companies in the

direction of establishing global scale.

Some industries have to establish a local presence to do successfully grow and do

business in a foreign nation. The smartphone industry is able to circumvent that type of political

or nationalistic pressure because most of the manufacturers are not vertically integrated enough

to make a difference. In each country, there is a local wireless service provider that smartphone

users acquire their service through, as well as a local retail vendor who they buy their phones

from. Therefore, the smartphone industry was able to rapidly globalize because the “pie” of the

value chain was fragmented, leaving something for everyone. That made the introduction of

wildly successful smartphones, wildly successful for every company in the value chain, from the

suppliers to the local retailers to the service providers. It is similar to the rapid globalization of

consumer electronics, where many of the devices were created in the U.S., but globally minded

Japanese companies took those inventions, got them into the mass consumer market and rapidly

scaled up production and implemented supply chain management to lower costs.

Competitive Structure of the Smartphone Industry

The smartphone industry is very competitive due to the convergence of technologies

embedded in smartphones – namely, internet computing, digital camera, wifi, Bluetooth and

multi-media capabilities. Smartphones have the capacity to displace some versions of the single

function product as technological advances dictate.

With the forecasts for global growth of smartphones, the competitive structure of the

industry is changing rapidly. New companies are entering the market every year, rivalry is

10

Intensity of RivalrySTRONG

Barriers to Entry

STRONG

Bargaining Power of

BuyersSTRONG

Threat of Substitutes

WEAK

Bargaining Power of Suppliers

WEAK


intense for both the handsets and the operating systems. Buyers are presented with a much

broader range of smartphones than in the past, driving average wholesale prices down, even for

Apple. Due to the growth and market size for smartphones, competition is intensifying for

suppliers to the manufacturers, further lowering the cost of the value chain. Finally, no actual

substitute products have emerged yet, but some analysts are projecting that tablets may eat into

smartphone sales in the future, as some companies experiment with merging the smartphone with

tablet computing for consumers who can not afford to buy both. The figure below summarizes

the competitive structure of the smartphone industry.

Barriers to Entry

Barriers to entry are strong, both for smartphones and their operating systems. While the

focus of this paper is on the hardware, the software is as much as part of the changing

competitive structure of the industry. The barriers faced by hardware manufacturers are due to

11


the R&D and capital investment required. The barriers faced by operating system developers are

due to the difficulty of getting manufacturers to use their operating systems applications because

of first mover advantages in getting applications developed for their platform by third party

developers. Wireless service providers select which phones they will allow to use their network.

And switching costs for customers to use smartphones that are not available on their networks is

high.

The barrier to entry that is mostly beyond the control of the industry is the switching

costs associated with moving to a new service provider to take advantage of the functionality of a

new smartphone product. Many wireless service providers require their customers to sign two-

year service agreements in return for discounts on the smartphones for their network. Also,

customers are not as likely to leave a wireless service provider that works well for them. Call

reliability and availability still trump functionality. This barrier is one of the reasons that Apple

expanded the use of the iPhone from the AT&T network to include Verizon, the largest wireless

provider in the United States. The benefit of being able to circumvent that barrier caused some

Apple critics to quiet their criticisms to a degree. Many argued that all potential iPhone users

had migrated to AT&T and that there would be poor demand for the iPhone on Verizon’s

network. However, on the first day that Verizon customers were able to pre-order the iPhone,

February 4, 2011, Verizon had to halt sales because its entire beginning allotment of 550,000

phones had been ordered in less than a day (Ogg, 2011).

Smartphone Hardware

While the cost of entering the smartphone industry is significant given the plant and

technology costs, the investment capital is there, which keeps the barriers to entry relatively low

because there is money to be made. The emerging dominance of smartphones is comparable to

12


the dot com boom. Startups for smartphones themselves, as well as the component technologies,

continue to be funded by venture.

A recent attempt to fragment the smartphone market has been taken by Hutchison

Whampoa Ltd. (HWL), which released the INQ phone targeted at mobile phone users between

18 and 24 (Kapica, 2010). It was touted as being a low-cost social networking smartphone with

built in applications that automatically log the phones’ users into Facebook, instant messaging,

twitter and email. The idea is to target users for whom traditional smartphones are perceived to

be too expensive, especially the data plans. At the time, the CEO of HWL cited a statistic that

“82 precent of Canadians under the age of 30 do not own a smartphone because the cost is

prohibitive.” The phone uses a less robust operating system that requires much less processing

power than typical smartphones, which translates into cheaper chip component costs.

Smartphone Software

The parallel threat of entry for the smartphone industry revolves around the operating

system (OS). The capital investment for OS development is less than the capital requirements

for hardware, but it is much more difficult for new entrants to make their mark. The largest

barrier to entry for new operating systems is the need to persuade a manufacturer to adopt a

particular OS. The barrier is so difficult to overcome because of the applications development

aspect of the industry.

Switching Costs

Similar to PC operating systems and gaming consoles, it is very difficult to introduce a

new OS due to the reliance on third party developers to create applications for that OS.

Additionally, mobile manufacturers and the wireless service providers often market the variety

of applications that are available for the users of the smartphones on their networks. Finally,

13


smartphone OS use is concentrated, where the top four smartphone operating systems account

for 94% of all units sold. While still strong, switching costs are not nearly as strong as the lack

of portability of mobile phone numbers before changes in that practice by the wireless providers,

which kept many customers attached to their providers.

Bargaining Power of Buyers

The bargaining power of buyers is strong. This is due to the increasing importance of

scale for most manufacturers for pricing, broad range of products available, and the emergence

of lower cost wireless providers who have reduced switching costs by not requiring service

contracts.

Economies of Scale

Due to the economies of scale of production, smartphone manufacturers need to sell a lot

of phones to be cost competitive in production and pricing. Even Apple significantly lowered

the price of the iPhone from the first generation to the next. There are only so many people who

will spend $500 or more on a smartphone. Because the industry is shipping hundreds of millions

of units per year, this helps keep prices down for consumers, limiting the profitability of most

manufacturers. A long-term threat for the industry is in the eventual commoditization of

smartphone hardware, which would strengthen buyers even further. However, that is not

forecasted in the near term yet.

Product Variety

In addition to pure pricing issues, the number of smartphone models is increasing rapidly

as most manufacturers broaden their product diversity to hit different price points and different

demographics. Some manufacturers, like Research in Motion, have primarily targeted business

users of smartphones with their iconic trackball approach to scrolling through email and text

14


messages. However, as technology convergence continues in successive smartphone

generations, the line between casual user and business user is blurred, prompting it to release

more BlackBerry models. Only Apple is employing a single model strategy at this point.

Low Cost Wireless Providers Reducing Switching Costs

In mobile phone service, a niche had been carved out to provide service to less than credit

worthy customers by having them pay for their minutes up front. This system worked well until

the advent of the smartphone and the technologies that support it. Now, to take market share

from the larger wireless service providers, some wireless service providers are reducing or

eliminating the service contract period, which reduces the switching costs to customers and

strengthens their position with the ability to switch wireless service providers more easily. New

wireless service providers, such as StraightTalk (30-day service contract), BoostMobile (no plan)

and Kricket (no plan) all attack the service contract as their business strategy that also happens to

lower the switching cost barrier slightly. However, such approaches may become a part of

customer expectations in the long-term that strengthens their ability to switch smartphones in a

relatively quick period of time.

Bargaining Power of Suppliers

The bargaining power of suppliers is weak, with growing smartphone sales attracting

more competitors in the component industries. There are many components in a smartphone, but

the ones with increasing competition are (for function and cost) are the screen/display,

applications processor, and ancillary wireless (Hiller, 2010). These components are sources of

innovation and, increasingly, competition among the suppliers to the manufacturers of

smartphones.

15


Screen/Display

The competition to improve the screen/display, which consists of a scratch resistant glass,

a capacitive or resistive touch control layer, and the underlying display itself. Each one of these

components is undergoing swift innovation and adaptation. The touch control layer matters

because capacitive touch screens cannot be used with gloves or styluses, while resistive touch

screens can. The biggest battle is occurring in the display itself (Grewal, 2011). The two

dominant display technologies are liquid crystal displays (LCD) and active matrix organic light

emitting diode (AMOLED). The LCD is the more common, but both have shortcomings that are

spurring continued innovation. The first new display technology is the in-plane switching (IPS)

screen used in the iPhone (manufactured by two Japanese companies) that overcomes the

shortcomings of LCD and AMOLED displays, but costs significantly more.

Given that Apple only accounts for 4% of global smartphone sales, that leaves plenty of

room for more suppliers. Two new competing technologies are being developed to take

advantage of this opportunity – Super AMOLED and Super LCD (Grewal, 2011). There are

three characteristics on which this technology battle is being fought and that is price, viewability

in sunlight and power consumption.

Applications Processor

Currently, the applications processor in smartphones is dominated by the ARM

architecture contained in 90% of all sold smartphones and used in most consumer electronics.

As smartphones have gotten technologically more sophisticated and greater processing capacity

is needed for the embedded and third party applications, other manufacturers of processors have

set their sights on the smartphone industry.

16


Other global manufacturers of application processors were not seen as competitive

because of energy consumption by their chips. As general innovation and technological

improvements have been made, along with miniaturization in laptops, some of these companies

see tablets and smartphones as the next growth market. In the 2011 Mobile World Congress,

Intel and MIPS Technologies (both U.S.-based makers of processors) announced that they would

be introducing chips for tablet PCs (Intel only) and smartphones (Miller, 2011). As with all

smartphone technology, they are focused on the highest performance at the minimum level of

energy usage because phone battery life is still a key factor in the consumer smartphone

purchasing decision. Intel and MIPS Technologies are vertically integrated processor

designer/manufacturers, while ARM Holdings, the owner of the ARM architecture, licenses its

design to other companies for manufacturing.

Ancillary Wireless

Ancillary wireless chips contain the functionality for GPS, Bluetooth and Wi-Fi. This

component is critical to connecting to other networks and devices. Additionally, as these chips

improve, through the Wi-Fi capability, it can help keep data costs down, which may become a

more important feature in the long-term as internet bandwidth approaches capacity and the

service providers attempt to promote tiered data usage rates.

Threat of Substitutes

The threat of substitutes is weak. While possibly being a substitute for PCs, tablets are

not substitutes for smartphones. In fact, they are a move in the opposite direction and reason for

the popularity of mobile phones – size. Also, the tablets cost more than smartphones without the

communication capacity unless an additional service, such as Skype is used and, newer

smartphones are being made that include Skype, negating the need for a PC. Land lines are no

17


substitute for smartphones because land line usage has been declining ever since the mass

marketing of mobile phones and many households no longer have land lines, but rely upon

mobile phones and the internet for communicating.

Intensity of Rivalry

The intensity of rivalry is strong. The smartphone industry rivalry is so intense due to the

relatively large number of competitors, market growth attracting new investors, and outsourcing

of key components. Improvements in technology and manufacturing also make it easier for

companies with a lot capital to put out a marginally competitive smartphone.

Large Number of Competitors

Although the top 10 manufacturers account for two-thirds of global sales, the remaining

one third of sales constitutes 137 million smartphones sold by 50 other companies. Apple

represents only a 4% market share of smartphones. However, the introduction of the Apple

iPhone and competing devices have driven Nokia’s market share from 51% in 2007 to just 27%

in three years (Faris, 2011). The competition on the OS side has seen Google’s Android OS

become the number one smartphone OS in just two-and-a-half years and seen that part of the

battle become more intense as Nokia abandoned its Symbian OS and goes to a Windows OS for

smartphones.

Market Growth Attracting New Investors

Not only is market growth attracting new investors, but the prospect of another profitable

firm like Apple brings investors to hear pitches for new companies. Until smartphone

manufacturing is commoditized, its high growth and higher product margins will make the

industry attractive to companies from the component level to the design level.

18


Outsourcing of Components

As the battle for smartphone supremacy is waged in hardware and software applications,

many of the key components are often outsourced. For Nokia, the world’s number one seller of

mobile phones, its strength as manufacturer managing its global supply chain is no longer an

advantage. Smartphone users desire for functionality, ease of use (Android OS and iOS rank

high on that list), and applications dominate consumers decision process, who makes what is less

important than the sum of the whole.

For example, the emergence of the Chinese smartphone companies ZTC and Huawei

Technologies are based not only to regional proximity, but also to the fact that many smartphone

components are manufactured in China or that geographic region. Rivalry is also increasing

because most smartphone manufacturers are only involved in a few areas of the value chain from

the wireless service provider to the user of the smartphone, as shown in the graphic below.

19


Ho

w the Five Forces Shape the Industry

Wireles

s Provider

AT&T

Verizon

Billing

AT&T

Verizon

Parts

Other

Firms

Design Appl

e

Assembly

Other

Firms

OS/GUI Appl

e

Apps

Apple

Third Party Developer

s

Branding Appl

e

Sales Appl

e

User

Wireless

ProvidersAppl

e Retai

l Stores

20


The smartphone industry is a period of intense competition and change. The landscape of

the industry has been remade twice in a relatively short period of time, first by the release of the

iPhone, which tackled many of the complaints that users had about smartphones (and Apple

media players), second by the ascendance of Android OS as the dominant platform for

smartphones and the lucrative apps market associated with it.

The ways Porter’s five forces interact are key to how the industry has changed. The

weakness of suppliers is a crucial part because strength on the part of suppliers can actually slow

innovation and makes the cost of doing business much higher. That would make the industry

less profitable and, therefore less attractive to be in. The weakness of suppliers spurs innovation

on their part to take advantage of the industry’s growth prospects. The weakness of the threat of

substitutes is also an important factor. Without the threat of a viable substitute, investors simply

focus their attention on opportunities in the industry rather than focusing outside of the industry

for its replacement technology. The smartphone is nearly the ideal miniaturization of many

electronic devices rolled up in one. That is a very difficult technological feat to achieve.

21


The weak forces that act on the industry act as complements to the strong forces. While

the competition is fierce, the barriers to entry into the industry are strong and the growing

economies of scale make it that much more difficult for low capitalization firms to enter the

industry, even if the weak supplier force makes it easier to source the components. The required

R&D for new designs is in the billions. Nokia spent $4 billion on R&D in 2010 alone. The

power of buyers is spurring further innovation in smartphones, seeking to address many

consumer needs and wants in a single device that is easy to use and reliable. The market growth

is a testament to the consumer demand for smartphones and when they really do the job well,

such as the iPhone, then consumers are even willing to pay a premium. Finally, the intensity of

rivalry is another force for innovation where fortunes can change dramatically in 10 years (see

Motorola or Nokia) and the pace of innovation in different aspects of the smartphone industry

make it hard to predict the future, but makes it exciting and profitable all the while.

Strategic Group Map

In the current dynamics of the smartphone industry, Apple’s financial and brand image

success with the iPhone make it the 800 pound gorilla in the industry. Mobility barriers for its

strategic group of proprietary OS platforms allow it to achieve superior profitability and make it

difficult for common OS platform firms to switch strategies to its approach. However, the long-

term threat to Apple is the attempt by Google to erode its profitability and image, not by

competing within its strategic group, but by strengthening the common OS platform strategic

group. Google hopes to topple Apple by becoming the king maker of the smartphone OS and

reaping superior profits for itself with a transactional business model based on the Android

smartphone applications marketplace.

Major Groups and Differentiating Strategies

22


Traditional views on strategic grouping may evaluate the smartphone industry from a

traditional perspective, such as degree of vertical integration or geographic reach. The

technology of smartphones overcomes many cultural barriers to some consumer products. The

smartphone has changed rapidly in the last decade and can be broken into two strategic groups –

common operating system platform and proprietary operating system platform users. The two

graphics on the following page show how the two strategic groups are oriented by revenue and

product diversity (number of models) with the bubble size indicating relative profitability in U.S.

dollars (Nokia is included in both because it recently announced that it was going to a Window

Phone 7 OS).

Nokia

Samsung

LG

Sony Ericsson

Motorola

HTC

ZTE Huawei

Technologies

Low

Low

High

High

Product Diversity

Common OS Platform Strategic Group

23


Low

Low

High

High

Product Diversity

Revenue

Proprietary OS Platform Strategic Group

Nokia

Apple

RIM

Nokia

Common Operating System Platform

Most smartphone manufacturers select one or more common OS platforms to be used in

its different models. They then tailor their hardware around the capabilities and user interface of

the software. The common OS platforms are Android, Windows, and Linux. The members of

this strategic group compete against one another on features, styling and price. Cost

competitiveness is an important factor for success in this strategic group. Until the recent

strategy mobilization of Nokia,

Proprietary Operating System Platform

Other manufacturers, such as Apple, Nokia, Research in Motion and Palm rely upon

custom proprietary OS platforms that they control. In their strategic group, they attempt to put

out a better smartphone by being able to develop the OS based on the features and functionality

that they believe the product needs and do not want to be limited by constraints that a third party

OS platform may entail, such as Android. In a sense, these firms are taking responsibility for a

portion of the value chain that most other companies circumvent. Overall, this strategic group is

24


more profitable than the common OS platform group, but that is primarily due to Apple’s

financial performance.

Mobility Barriers

The mobility barriers that separate Apple’s strategic group from the other group are

proprietary operating system development and branding and marketing. The companies in that

strategic group know how to marry hardware, software and a distinct style or aesthetic into their

smartphones.

Proprietary Operating System Development

The key differentiator for this strategic group is the development of its own proprietary

operating system. It is a daunting task for another competitor that doesn’t already have it as part

of its business model. Research and development (R&D) expenses are significant. For example,

in 2011, Nokia announced a partnership with Microsoft to help Nokia stop the loss of market

share in smartphones and to help Microsoft gain market share in the smartphone OS arena, where

Windows Phone 7 will now become the de facto OS for all new Nokia smartphones. In 2010,

Nokia had spent $4 billion on OS R&D, while Apple had only spent half that amount. Throwing

money at a problem doesn’t guarantee that a company will end up with robust, well-functioning

smartphone OS.

Branding and Marketing

Most of the companies in this strategic group have well defined brands that each have

their own distinctive characteristic that their loyal customers instantly know marks it as their

product. For Apple, it was the multi-touch screen with no mini-QWERTY buttons, as well as a

look and feel that its iPod customers would have already been familiar with. BlackBerry had

earned the nickname “crackberry” from some of its business users because they found the use of

25


its trackball combined with the ease of its user interface addictive. The trackball makes it easy

for users to scroll through their email with one hand. Each company had a distinctive identity for

its smartphone products and had developed a branding and marketing strategy to complement the

strength and uniqueness of its products.

Implications for Apple

Apple is seen as the undisputed champion of the smartphone industry that helped turn it

upside down and laid a path of innovation that has quickly been adopted by competitors.

Apple’s business model has proven to be exceptionally profitable at this point, based on a first

mover advantage in smartphones. Its greatest challenge does not come from its strategic group,

but from the common OS platform strategic group that is attempting to use economies of scale,

decreasing cost of key components, and a larger installed base OS to attract consumers away

with a large app presence to reduce Apple’s market share and profitability. Apple is still number

one, but its competitors are constantly adapting to position themselves to knock it over, as Apple

did to Nokia a short three years ago.

26

References

Abramsky, M. (2009, August 18). Wireless Industry: The New World Order. RBC Dominion

Securities Inc. Toronto, Canada. Retrieved from dir.rbcinvestments.com/getimage.asp?

content_id=43844

Arndt, M. and Einhorn, B. (2010, April 15). The 50 Most Innovative Companies. Bloomberg

BusinessWeek. Retrieved from http://www.businessweek.com/magazine/content/

10_17/b4175034779697.htm?chan=magazine+channel_special+report

Farris, S. (2011, April 1). Is Windows Nokia's Lifeline? Time. Retrieved from

http://www.time.com/time/magazine/article/0,9171,2062416,00.html

Fast Company (2011). The 50 Most Innovative Companies. Retrieved from

http://www.fastcompany.com/most-innovative-companies/2011/

Fey, V. and Rivin, E. 2005. Innovation on Demand: New Product Development Using TRIZ;

Cambridge University Press; Cambridge, UK

Grewal, J. (2011, March 5). Know your smartphone Screens. Techin5. Retrieved from

http://techin5.com/2011/03/know-your-smartphone-screens/

Hiller, I. (2010, July 27). Top five components of today’s smartphones. RCRWireless.

Retrieved from http://unplugged.rcrwireless.com/index.php/20100727/devices/2277/top-

five-components-of-todays-smartphones/

iPhone: Who's the real manufacturer? (It isn't Apple). (2007, June 29). TechPluto. Retrieved

from http://texyt.com/iphone+manufacturer+supplier+assembler+not+apple+00113

Kapica, J. (2010, July 27). INQ introduces a low-cost smartphone. Digital Journal. Retrieved

from http://www.digitaljournal.com/article/295194


Miller, M. J. (2011, March 1). Intel and MIPS Challenge ARM In Mobile Processor

Architecture. PCMag.com Forward Thinking. Retrieved from

http://blogs.pcmag.com/miller/2011/03/intel_and_mips_challenge_arm_i.php

Ogg, E. (2011, February 16). Verizon iPhone sales rumored to be underwhelming. cnet.

Retrieved from http://news.cnet.com/8301-31021_3-20032267-260.html

Six Smart Characteristics of a SmartPhone. (2010, July). TechPluto. Retrieved from

http://www.techpluto.com/smartphone-characteristics/

Wagner, A. (2011, February 2). Apple Accounts for 50 Percent of the Smartphone Market

Profits! iPhoneLife. Retrieved from http://www.iphonelife.com/blog/14092/apple-

accounts-50-percent-smartphone-market-profits

Weintraub, S. (2011, January 31). Canalys: Android becomes the world's leading smartphone

OS. Fortune Tech. Retrieved from http://tech.fortune.cnn.com/2011/01/31/canalys-

android-becomes-the-worlds-leading-smartphone-os/

28

Documents

Smart Phone Industry Globalization Assessment