Power of substitutes – Handset manufacturers

Exhibit II (B) 2 – Part A: Level 2 Analysis for Handset Manufacturer Industry

II (B) 2a: Threat of Rivalry

Within the US and European markets, the firms competing in the industries are primarily competing on product differentiation, as the penetration levels in the US are at about 70% while in some of the European nations like UK, Netherlands and Sweden, it is almost 100%^cxxxii. In US and Europe, there is a growing demand for smartphones. Handset manufacturers have realized that in addition to competing on price basis by producing large volumes of low-end handsets, there are potential profits to be achieved by producing lower volumes of high-end mobile devices that are capable of doing much more than just a mobile phone. Due to these high profits in these niche low-volume high-end markets, globally the number of competitors in the handset industry still remains reasonably high, although the market is dominated by a few big players. (highlighted portions redundant w/ earlier section)

With regards to China and India, the firms are competing to gain incremental market share in a relatively nascent, fast-growing market. The primary driver in India and China is price. Hence, the overall industry growth continues to be attractive across the globe.

To attain economies of scale and reduce handset costs in the low-end handset segment, manufacturers tend to add capacity in large increments. In the high-end handset segment, the volume is considerably lower. For example, in India, handset sales are expected to grow to 500 million by 2010^cxxxiii. On the other hand, in the smartphone segment, the number of handsets shipped worldwide in Q3 of FY05 was approximately 12.5 million^cxxxiv.

Diversity of competitors is comparatively low in the handset manufacturing industry, as most of the players are from the telecommunication industry and provide similar product offerings in terms of basic handset functionality. Some firms though, such as Samsung and Sony are diversified into different (and in some cases complementary) business ranging from semiconductor to consumer electronics.

Product differentiation is low at the basic handset level though it is high in the US and European markets where sales are driven by handset replacement to gain access to new features and style

Demand continues to be strong across the globe, although for different reasons. The demand in US and Europe is driven by desire for new technology with demand growing by 210% in 3Q of FY05 as compared to 3Q of FY04, while in China and India, is driven by the need to communicate.

Fixed costs for the handset industry are comparatively higher than variable costs, especially due to increased R&D associated with reducing handset form factor and increased functionality.

Exit barriers are high for the handset manufacturing industry as big players such as Nokia, RIM and Palm are primarily focused in the handset market, although there are a few exceptions like Samsung and Sony which are into other business segments like semiconductors and consumer electronics as well.

Entry barriers are low due to the business model adopted by most manufacturers where they have outsourced the part manufacturing to other firms and are primarily involved in the assembling stage of the handset manufacturing process. Also there are not many proprietary technologies which cannot be imitated by new entrants.

Overall, threat of rivalry remains moderately unfavorable to a new entrant in the handset manufacturing industry.

II (B) 2B: Barriers to Entry

This is offset though by high chances of competitor retaliation, competitor access to distribution channels and economies of scale. Entrants need to provide an exceptional level of product differentiation, have access to service providers and an outstanding brand name to gain entry in the highly competitive handset manufacturing industry. For example, RIM has created a consumer space for itself in the corporate world, by providing an entire infrastructure for the corporate users to be able to get access to corporate email, and other important content on their mobile handsets. Sony on the other hand has leveraged its brand name in consumer electronics to design its popular walkman-based handsets.

Overall, barriers to entry are moderately unfavorable to a new entrant in the handset manufacturing industry.

II (B) 2c: Supplier Power

The profits for the suppliers are comparatively low due to standardized components used across a majority of the handsets.

The chance of vertical integration with regards to parts suppliers entering the handset manufacturing industry is low, although there is some history of big players like Ericsson partnering with firms like Sony, to enter the handset consumer space. Product differentiation in the form of parts is very low and hence provides the ability for handset manufacturers to switch suppliers relatively easily, if need be.

Overall, the lack of ability of suppliers to influence the handset manufacturers is moderately favorable to the handset manufacturing industry.

II (B) 2d: Buyer Power

The buyer concentration levels are low as the demands are widespread across different global markets. The handset manufacturing growth rate is somewhat high on account of several key factors: the surge in demand for replacement handsets in the US and Europe, continued technology innovations, and the ability of the handset manufacturers to deliver these features at a reasonable price to high-end consumer market segments. This is highlighted by the fact that the CAGR of 3GSM subscribers in Europe has been a staggering 330% over the last couple of years, while in the US the number of subscribers using their handsets for listening to music, watching video or surfing the internet shows the highest potential for growth^cxxxvi. Growth is also driven by low levels of market penetration in the emerging markets of India and China.

There are reasonable switching costs for the new consumer, especially in the high-end handset market, with regards to cancellation of contract with their current service provider, the potential purchase of a new handset and the lock-in associated with a new contract with the new service provider (these costs are comparatively low for existing customers who are usually upgraded to high-end handsets for a two year contract renewal without any contract cancellation fee).

These disadvantages to the consumer are offset by the fact that there are numerous options available to them in terms of different value propositions with regards to features and price. For example, a user who does not wish to use the internet or play MP3/videos has numerous choices of handsets with much lower costs (and in some cases free) with a contract. Increasingly, handset firms are unable to charge a premium on features such as MP3/video playing support as these features are becoming commoditized. Also, consumers in the US can now transfer their telephone numbers from one provider to the next, thus eliminating the costs associated with a changed number when switching service providers. There is also a strategy adopted by some handset manufacturers like Nokia to compete on volume basis, which increases the buyer power by forcing the manufacturers to attain economies of scale. Since a certain demand needs to be generated in order for volume manufactures to sustain reasonable profits, they are beholden to higher buyer power in these segments.

There is no threat of vertical integration in terms of customers entering the handset manufacturing industry.

Overall, buyer power is moderately unfavorable to the handset industry.

II (B) 2e: Threat of substitutes

There are a number of substitutes available for the buyer such as mobile computers, the internet, landlines, VoIP etc. Hence, the ability of substitution by the buyer is high.

However, the buyer propensity to substitute is comparatively low unless the buyer is unhappy with the service or is looking to get out of an expensive contract.

On the supply side, there are comparatively few consolidated buyers for the parts, and hence they do not have the same level of substitutability as buyers.

Overall, the power of substitutes is high and unfavorable to the handset industry.

II (B) 2f: Role of complements

Numerous vendors have access to mobile operating systems like Windows Mobile, Symbian, Linux, etc. through licensing policies of the providers of the OS. This can be offset by the capabilities of the handset manufacturers to provide a wide array of exclusive, user-friendly software applications. For example, RIM has gained inroads into the corporate mobile workspace by providing an entire infrastructure to meet corporate needs. Music and video playing capabilities can be easily replicated by competitors although having exclusive access to content does provide a competitive edge. For example, iTunes can provide Apple with a significant competitive edge for its iPhone offering due to exclusive access to music, video and news libraries. Other handset factors such as dimensions, weight and battery life are also gaining importance. For example, on its E888 handset, Samsung competes based on its small size and weight^cxxxvii.

Overall, the complementor power is moderately favorable to the handset industry.

Directory: groups
groups -> What is ascaa?
groups -> Tiger Leaps Progress Update from Tenafly High School March 28, 2012 English
groups -> Personal Data: Name : Prasanna. S educational Qualification
groups -> Traffic alert and Collision Avoidance System or tcas
groups -> 1980s Type Card Master List from Standard Catalog 1980 Burger King Phillies
groups -> Lima Site 85 Personnel List
groups -> General knowledge
groups -> Kenneth pomeranz the great himalayan watershed
groups -> Christina Maria Bergqvist

Download 7.3 Mb.

Share with your friends: