Essay on "Mobile Phone Industry Is Growing"

Essay 9 pages (2613 words) Sources: 9

[EXCERPT] . . . .

Mobile phone industry is growing, but most of that growth is the result of gains in smartphones. Traditional phones are seeing slowing growth and increasing commoditization as evidenced by lower selling prices per unit. The current market leaders are those focused on traditional phones, but they are losing share rapidly to those focused on smartphones. It is predicted that smartphones will supplant traditional mobile phones, leading to the conclusion that any company serious about maintaining a presence in mobile phones should focus on building out a portfolio of smartphones (RIM) and adopting a penetration strategy (Nokia). Firms that choose to remain in traditional firms will need to adopt a cost leadership strategy (Huawei).

Situation Analysis

The cell phone industry has revolutionized global telecommunications. The handset industry has matured in some markets, but there is a high rate of churn with customers purchasing new phones every year or two, and this keeps sales figures relatively high despite growth being slow. There are a few different segments within the industry, most notably the differentiation between smart phones (Blackberry, iPhone, etc.) and conventional cell phones.

The industry leader with a worldwide market share of 36.6% is the Finnish company Nokia. Korea's Samsung is second with 21.8%. Rounding out the top five are Korea's LG (9.2%), Canada's Research in Motion (RIM), maker of the Blackberry (3.6%) and the partnership of Sony Ericsson (3.6%). The remaining companies in the industry comprised 25.3% share of the market (IDC, 2010). The diversity of continents and countries represented indicates that cell phone manufacturing is one of the world's truly global industries.

The global cell phone market declined during the economic downturn, experiencing market contraction at that time. Consumers were delaying purchases of new phones until the economy showed signs of recovery. With those signs, consumers are once again upgrading their phones. Sales grew by 21.7% in the first quarter of 2010 on a year-over-year basis. Shipments were 294.9 million units during the quarter. There is a split in growth patterns between the industry's two major segments. The traditional cell phone segment is mature, experiencing relatively slow growth worldwide. The smart phone segment is growing rapidly, which has led to RIM replacing Motorola in the top five cell phone vendors (IDC, 2010).

As a result of the growth in smartphones, the industry overall is becoming more profitable. However, firms without a strong smartphone portfolio are facing declining profitability as they need to cut prices in order to attract buyers. LG is one such company, as is Nokia, although both firms are expected to address the issue in the coming year. Both of these firms have strong brand recognition in the traditional handset industry, though, and this has helped drive strong unit sales even though profitability and market share have declined. Samsung has a stronger smartphone portfolio. RIM has the leading smartphone in the Blackberry and does not compete in the traditional phone market at all. It has tremendous brand strength in its segment, however, as one of the pioneers of the devices and remains at the cutting edge of smart phone technology. Sony Ericsson is struggling to introduce smartphones, and this is causing volume declines. That company has returned to profitability recently and is working on overhauling its lineup in order to remain competitive. Motorola is the number six in the industry and has just begun launching its smartphones in the U.S. (IDC, 2010).

There are dozens of minor players in the industry as well. Some compete almost entirely in smartphones. Some smartphone companies are focused on Western markets, while others are introducing low-cost smartphones in the mainland Chinese market. While many markets are in a slow growth phase overall, China is growing rapidly. Market penetration is already high, but the Chinese are moving towards smartphone adoption rapidly, fuelling strong growth (IDC, 2010).

With a total worldwide penetration estimated to be 4.6 billion and headed for the 5 billion mark in 2010, the cell phone consumer is every person with enough money to purchase one (Parkes & Teltscher, 2010). Penetration is at 100% in over 70 countries (ITU, 2010). This makes segmentation for individual phone products difficult. Customers are generally segmented by primary phone product (smart or traditional) and from there are segmented largely by price point.

Macro Environment

The most important factors in the macroenvironment are Economic, social-cultural, competitive, and technical. The political environment is of limited relevance to the industry -- while each nation governs telecommunications tightly and independently, this is more a concern for service providers than for handset manufacturers. The demographic environment is not as relevant as one might think. Because market penetration is over 100% in 70 different countries, demographic breakdowns and trends are of little relevance beyond global and developed world population growth. Socio-economic trends are more relevant and will be discussed shortly.

The economic environment is critical to the mobile handset industry for a couple of reasons. The first is that the industry overall is subject to economic fluctuations. During the global recession in 2009, the handset industry slumped, with most firms in the industry losing sales volume as a result. Consumers delayed purchase of new devices, leading to the slump. In 2010 thus far, the economic recovery had buoyed sales. In addition, the economic status of a nation is highly correlated with telecommunications penetration (ITC, 2010). Therefore, as nations develop economically, they will see an increase in mobile phone demand.

The socio-cultural environment is also important. In 1999, diffusion of mobile phones was at around 900 million. However, the younger generation of consumers adopted the devices enthusiastically. The result is that the market continues to grow strongly. In addition, as mobile phone usage becomes increasingly the norm, even slow adopters and resisters purchase phones. In emerging markets, the trend towards mobile phone usage has resulted in consumers buying a phone as soon as their economic status allows.

The competitive environment is also critical to success in the industry. The industry is in a state of monopolistic competition. There are a many competitors and the product is relatively homogenous (McCain, no date). Firms attempt to differentiate slightly, through new designs and new features, in order to temporarily gain monopoly status in a particular niche before competitors are able to imitate or surpass that innovation. Differentiation in traditional mobile phones is limited at present, which combined with a maturing market has allowed for a large number of new competitors to enter the market, particularly at the low end. With smart phones, opportunities for differentiation are greater given the number of potential designs, operating systems and features. With smartphones, the threat of new entrants is lower and this has increased the degree of rivalry among the firms in the industry. Competition is intense in both traditional and smartphones because firms are working to carve out market share in a market that is constantly changing in terms of technology and dynamics.

The technological environment is another important external environment. Technology in the mobile phone business has been in a state of rapid change since mobile phones were invented. The current trend is towards the commoditization of traditional phones and the introduction of feature-rich smartphones. The pace of technological change in smartphones is rapid, and this change is reshaping the product life cycle. During the economic downturn while sales of traditional mobile phones slumped, demand for smartphones did not. In addition, the rise of smartphones has allowed for the emergence of new players into the market. RIM has risen into the top five mobile phone makers in the world and Apple has emerged as the #6 player. Firms not in the smart phone business are losing market share. The ability of traditional mobile phone makers to adapt to smartphone technologies is going to be the key determinant of success in this industry going forward.

There are several opportunities in the market. The first is the rapidly emerging smartphone market. Although barriers to entry are high, for firms with the technological capability to enter this market, there is substantial opportunity and smart phone adoption may in the coming years rival the market penetration of traditional mobile phones. Another opportunity is to become a low cost provider of traditional mobile phones. Some firms, such as China's Huawei, have already adopted this strategy. When low cost providers are able to mimic the design and features of higher-end traditional mobile phones, they will be able to win considerable market share. Lastly, there is still some room for geographic expansion. While the world's leading economies have adopted mobile technology, as economic progress brings more of the world into the economic mainstream, opportunities will become greater.

Segmentation

Geographic segmentation allows companies to market phones based on the country or region. This can be useful when there are broad trends within countries or regions. Behavioralistic segmentation is very closely tied to psychographic segmentation with cell phones -- different users want different features, but these are based on their interests, attitudes and values. Demographic segmentation is less useful since market penetration is 100%, with… READ MORE

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