Strategic analysis of Samsung's smartphone product portfolio: Countering the challenge from Chinese competitors A By Soo Jin Go Bachelor of Political Science, Korea University, 2006 MBA, Sungkyunkwan University, 2015 MASSACHUSETT" INSTITuTE OF FECHNOL0LGY JUN 2 4 2015 LIBRARIES SUBMITTED TO THE MIT SLOAN SCHOOL OF MANAGEMENT IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF SCIENCE IN MANAGEMENT STUDIES AT THE MASSACHUSETTS INSTITUTE OF TECHNOLOGY JUNE 2015 @2015 Soo Jin Go. All rights reserved. The author hereby grants to MIT permission to reproduce and to distribute publicly paper and electronic copies of this thesis document in whole or in part in any medium now known or hereafter created. Signature of Author: Certified by: Accepted by: Signature redacted MIT Sloan School of Management Signature redacted May 8,2015 (I Michael A. Cusumano SMR Distinguished Professor of Management Thesis Supervisor Signature redacted U Michael A. Cusumano SMR Distinguished Professor of Management Program Director, M.S. in Management Studies Program MIT Sloan School of Management
48
Embed
Strategic analysis of Samsung's smartphone product portfolio ...
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Strategic analysis of Samsung's smartphone product portfolio:Countering the challenge from Chinese competitors A
By
Soo Jin Go
Bachelor of Political Science, Korea University, 2006MBA, Sungkyunkwan University, 2015
MASSACHUSETT" INSTITuTEOF FECHNOL0LGY
JUN 2 4 2015
LIBRARIES
SUBMITTED TO THE MIT SLOAN SCHOOL OF MANAGEMENT IN PARTIAL FULFILLMENT OF THEREQUIREMENTS FOR THE DEGREE OF
MASTER OF SCIENCE IN MANAGEMENT STUDIESAT THE
MASSACHUSETTS INSTITUTE OF TECHNOLOGY
JUNE 2015
@2015 Soo Jin Go. All rights reserved.
The author hereby grants to MIT permission to reproduceand to distribute publicly paper and electronic
copies of this thesis document in whole or in partin any medium now known or hereafter created.
Signature of Author:
Certified by:
Accepted by:
Signature redactedMIT Sloan School of Management
Signature redacted May 8,2015
(I Michael A. CusumanoSMR Distinguished Professor of Management
Thesis Supervisor
Signature redactedU Michael A. Cusumano
SMR Distinguished Professor of ManagementProgram Director, M.S. in Management Studies Program
MIT Sloan School of Management
[Page intentionally left blank]
2
Strategic analysis of Samsung's smartphone product portfolio:Countering the challenge from Chinese competitors
By
Soo Jin Go
Submitted to MIT Sloan School of Managementon May 8, 2015 in Partial Fulfillment of the
requirements for the Degree of Master of Science inManagement Studies.
ABSTRACT
After entering the smartphone era, Samsung has recorded enormous growth in sales
and profits. It developed state of the art hardware technology and introduced innovative
features with its flagship models, the Galaxy S series. While it emphasized high-end product
development to compete with global vendors such as Apple, Samsung expanded its product
portfolio to the affordable segment. In the early stages, this strategy succeeded in increasing
revenues and market share. However, as Chinese vendors emerge in the global mobile device
market, Samsung has struggled to keep its market share in the low-end device markets.
Relatively cheap Chinese devices have attacked Samsung's affordable segment. Samsung's
strategy of utilizing economies of scale and the halo effect from flagship models was not
effective to compete against the price competitiveness of Chinese. Since the dynamic aspects of
competition and the importance of platform are increasing, Samsung needs to build a new
sustainable portfolio strategy integrating its platform service and hardware portfolio.
Thesis Supervisor: Michael A. Cusumano
Title: SMR Distinguished Professor of Management
3
[Page intentionally left blank]
4
Table of Contents
A BSTRACTT ................................................................................................................................................................ 3
1.1. M otivation................................................................................................................................................8
1.2. Objectives and m ethodology ...................................................................................................... 9
1.3. Sam sung Electronics overview ................................................................................................. 10
Chapter 2: A nalysis of the early sm artphone m arket...................................................................... 11
2.1. M obile devices m arket trend.................................................................................................... 11
2.2. The advent of Chinese vendors................................................................................................. 14
2.3. Sam sung's early sm artphone portfolio strategy................................................................. 15
Chapter 3: Analysis of mid and low-end segments in the smartphone market......................19
3.1. M obile devices m arket trend.................................................................................................... 19
3.2. A scending Chinese com petitors.............................................................................................. 23
3.3. Samsung's portfolio strategy for the mid-end segment................................................. 32
Chapter 4: Recom m endations....................................................................................................................... 38
4.1. N ew challenges in the m id and low -end segm ents............................................................... 38
4.2. Case study - Benchmarking Xiaomi's successful case ..................................................... 39
4.3. Sam sung's lim itations ...................................................................................................................... 41
4.4. Recommendation for Samsung's product portfolio strategy........................................ 42
RAM 1GB 1GB 1GB 1GBDisplay 5.0", 480x854 5.0", 720x1280 4.7", 720x1280 5.5", 540x960Camera 8M or SM +VGA 8M + 2M 8M +1.6M SM + VGABattery 2000 mAh 2000 mAh 2000 mAh 2500 mAh
Source: Hana Daetoo Securities Research Center
36
The fierce competition in the mid and low-end smartphone segment would be
expected to lead Samsung to a chicken game of losing its own profit, like in the semi-
conductor industry. Therefore, the success of lower price range smartphones depends on
creating other added values besides prices. (Song, 2014) Samsung's operating margin of
the IM division in 2014 dropped significantly to 13%, compared to 18% in 2013. The main
reason was lower sales records of the Galaxy S5 and the rise of mid-priced smartphones in
China. (Song, 2014) The Mini Series was also affected by poor reputation of the flagship
model. It showed that losing the leading position in mid-priced segment brings about a loss
of profits.
Figure 19. Operating Margin of Smartphone Manufacturers
30%
20%
0%
-10%-
-20%-Mar-
Samsung -A00e - Huawei
- Lenv - ZE- C0010ad
TCL
08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14
Source: Strategy Analytics
37
I
Chapter 4: Recommendations
4.1. New challenges in the mid and low-end segments
Recently, Chinese vendors are turning their attention to other markets out of China.
Xiaomi started to sell products in Singapore from 2014 and announced its launch in the
Indian market. In 2014, 6 Chinese players entered the Indian market. Lenovo launched 12
models in India from 2013, providing a wide price range of products from 4,000 to 36,000
rupees. The Middle East and Africa is another big emerging market for these vendors.
According to IDC research, the number of smartphones sold in Q3 2014 was up 300% year
on year. 40% of total handset shipments which reached 64 million units in Q2 2014 are in
the smartphones category. The leading countries are mostly GCC (Gulf Cooperation Council)
members such as UAE, Saudi Arabia, Turkey, and Kuwait but more developing countries in
sub-Saharan Africa are following the smartphone market growth at a rapid pace. The
primary factor is the extremely low-cost of devices from Chinese vendors. The main
Chinese vendors such as Huawei and Lenovo already entered this market and offered more
affordable devices than Apple and Samsung. According to IDC research, Huawei recorded
second place in the smartphone market, jumping its market share from 2% to 10% in Q2
2014. Samsung still remains the concrete leader with 45% market share but is struggling to
keep its position with 8% points market share drop from a year ago. (Shetty, 2014) In
addition, local brands outsourcing their phones from the production catalogues of
independent manufacturers in China have worked well with better functions but at much
lower prices than the main players. Tecno in Nigeria and Kenya is an example whose
smartphone shipments were up 269% year on year in Q3 2014. (Shetty, 2015)
38
Besides aggressive Chinese competitors, traditional players are preparing to start
over in the market. Nokia with Microsoft announced three mid-range segment devices on
September 4, 2014: Lumia 830, Lumia 730 Dual SIM, and Lumia 735. With high-end
specifications, 5" display, 10 megapixel camera, and LTE connectivity, Lumia 830 was
positioned in the mid-range price range, -E330/US$430. The others are clearly more
affordable than Lumia 830: Lumia 730 Dual SIM retailing at E199/US$257 and the Lumia
735 at E219/US$283D. (Llamas, 2014) For the entry market, Nokia launched the X series in
2014. The Nokia X retails at 89 euros and features a 4" touchscreen and a 3MP camera. The
Nokia X+ increases the memory and storage and raises the price to 99 euros. Finally, the
Nokia XL brings a 5" touchscreen and a front-facing 2MP camera for 109 euros. (Llamas,
2014) Surprisingly, Nokia utilized Android OS for lower specification and price. Nokia
targets the below $150 smartphone market, where 322.6 million units were sold
worldwide in 2013.
4.2. Case study - Benchmarking Xiaomi's successful case
Xiaomi's strategy is distinctive from other Chinese vendors. It gives up profit from
hardware, so provides well-featured smartphones at significantly low prices. Instead of
hardware sales, Xiaomi pursues profit from content and services. Its ultimate goal is
becoming a contents and services provider like Amazon, Google, or Facebook. Xiaomi has a
plan to expand its product portfolio to TV and home appliances in order to lock in more
users to its own eco system. Xiaomi's smartphones are still under the Android platform, but
Xiaomi created a unique and attractive user experience. Lei Jun, the founder and CEO of
39
Xiaomi, created a custom ROM in open source Android, named MiUI. MiUI has MiCloud, a
web storage service and MiTalk, a cross platform web-based messaging system. (Golovko,
2014) Xiaomi's user experience through MiUI, MI, aims at consolidating software,
hardware and services of all home appliances. By active discussion with Xiaomi product
users, Xiaomi has developed user-friendly features on its platform. After achieving
popularity with MiUI, he made a bet on a low-price and high-volume strategy in the market.
The price range is almost half of Samsung and Apple with similar specifications, so it could
capture first time smartphone users in China. As soon as they experienced Xiaomi's UX,
consumers became big fans of Xiaomi smartphones. Xiaomi spent little money for
marketing activities, depending on word of mouth and online direct distribution. Xiaomi
provides added value for consumers besides price. Therefore, Xiaomi has quickly emerged
as one of the largest smartphone manufacturers in 2014. This success comes from an
integrated strategy between hardware and platform. Xiaomi created a user friendly
platform which was transformed from Android and attracted consumers by affordably
priced high feature hardware. Although it has achieved most of the current success in China
where the government restricts Google and Android and supports Chinese platforms, the
next movement to foreign markets is expected by confirmed platform and product strategy
from millions of customers.
40
4.3. Samsung's limitations
Samsung has made an attempt to enhance its software competitiveness. However,
Samsung is evaluated as a hardware manufacturer, experiencing the failure of launching its
own operating system, Bada. Bada was an operating system based on Linux, mainly
developed by Samsung and Intel. Samsung initiated this development to target the
integration of a wide range of devices including smartphones, tablets, TVs, PCs, and other
consumer electronic appliances. This project started as LiMo (Linux Mobile) Foundation in
2007 and changed its name to Tizen Association in 2012. Samsung launched the Wave
series based on the Bada OS from 2009. However, it failed to expand its share in the
smartphone OS category and was absorbed into the Tizen project in 2013. Samsung
launched only two wearable smart watches with Tizen. However, without launching
hardware devices which is the core of mobile eco system, application developers cannot
help leaving the system, and vice versa.
In addition, Samsung established the MSC (Mobile Solution Center) in 2008 to
encourage development of content and services. It opened the "Samsung Mobile Innovator"
website for third parties to develop mobile software in October 2008. (Kim and Rhee, 2011)
In this website, application developers around the world shared ideas and were supported
to commercialize applications in "Samsung Apps". Furthermore, Samsung tried to secure
contents by strategic cooperation with contents providers such as Warner Brothers and
Universal Studios. The early strategy was to provide cross device contents to differentiate
products from Nokia. Samsung tried to expand its consumer range by providing compatible
contents to mobile, TV, laptop, and so on. However, Samsung considers software as
complementary to selling more hardware devices. The management level in Samsung
41
evaluated that content and services business can play a supporting role for making
hardware business as well as software business sustainable. Apple created a business
model of value added virtuous circle where device and content supports dramatic growth
in the market for each other. Looking at Apple's case, Samsung defined that the
sustainability of contents and services business had the capability to influence growth of its
core business continuously and repetitively. However, as a traditional hardware
manufacturer it faced high risk in jumping into a new business with high fluctuations.
Therefore, Samsung obtained contents by cooperation with contents providers instead of
developing them itself. Therefore, Samsung made an alliance with Google and became the
best contributor of Android's success.
4.4. Recommendation for Samsung's product portfolio strategy
Currently, more than hardware sales, contents and services are becoming the main
source of big revenue and profit. (Loo, 2015) As in Apple's success, controlling software is a
key factor of the company's success these days. Many successful companies in the IT
industry possess platforms in the eco systems like Google and Apple. Apple has established
a concrete ecosystem to seize power over content and services in the applications market.
Apple provides convenient SKD, a Software Development Kit and 70% of revenue per share
for application developers to lure them to join iOS spontaneously. (Kim and Rhee, 2011)
Apple succeeded in securing 1.4 million kinds of unique application software, two practical
online shops (iTunes music store and Apple App store) and simple operating systems (OS X
for Mac and iOS for iPhone and iPad) for customers.
42
There is an opportunity for Samsung to develop another OS in order to provide
more value for consumers. Xiaomi's success (MiUI) shows a good example of how to
circumvent the Android OS. Samsung has accumulated enough technology development
and experience of trial and error in the software business. Samsung can offer a distinctive
value using its core competency: convergence. Samsung needs to develop Tizen as an
operating system to unify multiple devices including mobile, TV, home appliances, and so
on. Samsung is perhaps the only manufacturer that is able to build this convergence eco-
system because it has all business divisions including consumer electronics, IT & mobile
communications, and device solutions. It has already settled mass production sites, R&D,
and distribution channels around the world. Using massive resources, Samsung can
develop a convergence OS easier than other competitors. This economy of scale also
supports its strong hardware strategy integrating price and marketing. Established high-
end technology and mass production can elaborate its marketing strategy to attract more
consumers in the ecosystem. Therefore, Samsung can create its own eco system and retain
its leadership in the fierce competition.
43
Chapter 5: Conclusion
Samsung has occupied the No.1 position in the global market just after its transition
to the smartphone portfolio. Apple is the only rival in this specific segment and its
distinguished product portfolio strategy which offers a wide range of products and has
succeeded in increasing sales units and revenues. However, the smartphone market
saturation is causing a shift towards low cost competition. Samsung needs to find a new
strategy to sustain its revenue growth. The war in the mid and low-end segments against
Chinese competitors is totally different from the war with Apple. Upon the same operating
system which is open for everyone, Samsung should attract more customers by very
limited differentiating points. What is worse, competitors have strength in price
competitiveness, which is the most important point for consumers of this segment.
Furthermore, as soon as they dominate the low-end market, Chinese competitors started to
encroach on premium segments with competitive prices, which is Samsung's main source
of share and profits. They aim to increase profits by securing a strong market position and
expanding product sales in the premium segment which has a higher operating margin. In
the premium segment, Samsung has led market growth using its own advanced technology
and alliance with Google against Apple. In this competition, Samsung should not offer just a
cheaper version of flagship models to low-end segment consumers like the Mini Series
because other competitors are providing smartphones with premium specifications at
relatively affordable prices. The key for Samsung is to find added value for consumers
besides price. How to build a strong power over platform and software is a key strategy for
the new competition. From the recent successful case of Xiaomi, Samsung needs to spread
44
its own ecosystem to consumers to confirm its competitive edge with attractive product
marketing strategies.
Faced with new challenges from various competitors, Samsung is showing that it
focuses on the original core competency. Galaxy S6 and S6 Edge emphasize the state of the
art technology of Samsung. The launching show in Barcelona pointed to strong competition
with Apple directly. However, it cannot ignore the enormous potential of the emerging
market and the mid and low-end segments. It is certain that Samsung is preparing for a
new takeoff in the smartphone market. Samsung is expected to show another success by
making the right strategic decision.
45
References
Danova, Tony (2013, August 20), Smartphones finally outsold feature phones in the global
market, Business Insider Australia
Golovko, Mykola (2014, September), Consumer electronics: outlook, trends and analysis,
Euromonitor International passport
Golovko, Mykola (2014, October), Beijing Xiaomi Co Ltd., in consumer electronics (world),
Euromonitor International passport
iSuppli. (2009), Cell phone industry's dirty little secret: China' 145 million unit gray market,
Retrieved from http://www.isuppli.com/china-electronicssupply-