Download - Smartphone industry samsung market analysis

By: Alix Gorshow, Cuong Nguyen, Diana Lopez-Ruiz, Taylor Pickering

The Smartphone IndustryIt’s a Samsung Galaxy

A strategic marketing analysis and report on the smartphone industry in the U.S. and the evaluation of Samsung Electronics’ role in the market.

2014Spring

The Smartphone Industry

Table of Contents

Executive Summary................................................................................................................ 4

The Smartphone Industry.................................................................................................... 5Industry Overview............................................................................................................................. 5The Problems...................................................................................................................................... 5The Objectives..................................................................................................................................... 5

Market Overview..................................................................................................................... 7Companies............................................................................................................................................ 7

Samsung Electronics........................................................................................................................................7Apple Inc...............................................................................................................................................................8LG Electronics Inc.............................................................................................................................................8Motorola Solutions Inc....................................................................................................................................9

Customers............................................................................................................................................. 9History of the Smartphone Industry.........................................................................................10The Smartphone.............................................................................................................................. 11Life Cycle Stage of the Smartphone Industry.........................................................................12Typical Benefits Sought By Consumers....................................................................................14Wireless Service Providers..........................................................................................................15Marketing Strategies in the Smartphone Industry..............................................................16Overview of Samsung and its Dominant Strategies.............................................................16

Environmental Analysis..................................................................................................... 19Competitive Analysis...................................................................................................................... 19Economic Factors............................................................................................................................ 19Legal Factors..................................................................................................................................... 20Technological Factors.................................................................................................................... 21Social and Cultural Factors.......................................................................................................... 21

Industry Opportunities and Threats..............................................................................23Opportunities................................................................................................................................... 23

Cloud Computing............................................................................................................................................23Personal Health Management...................................................................................................................24Less Expensive Smartphones....................................................................................................................24New Operating Systems..............................................................................................................................25

Threats................................................................................................................................................ 25Rapid Technological Change.....................................................................................................................25Decline in New User Rate...........................................................................................................................26Substitutions.................................................................................................................................................... 26Threat of Entry................................................................................................................................................27

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Samsung Evaluation............................................................................................................. 28SWOT Analysis.................................................................................................................................. 28

Strengths............................................................................................................................................................28Weaknesses...................................................................................................................................................... 30Opportunities...................................................................................................................................................31Threats................................................................................................................................................................33

Marketing Mix................................................................................................................................... 35Product............................................................................................................................................................... 35Place..................................................................................................................................................................... 35Price..................................................................................................................................................................... 35Promotion..........................................................................................................................................................35

Future Prospects and Vision............................................................................................. 36

Action Plan: Strategies and Tactics.................................................................................37Objective 1: Develop a Unique Brand Community...............................................................37Objective 2: Develop Biosensors Integrated with Cloud Computing.............................37Objective 3: Produce a Cheaper Smartphone........................................................................38

Conclusion............................................................................................................................... 39

Appendix A.............................................................................................................................. 40

Appendix B.............................................................................................................................. 41Samsung SWOT Analysis............................................................................................................... 41Smartphone Industry OT Analysis.............................................................................................41

Bibliography........................................................................................................................... 42

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Executive Sum mary This report will focus solely on the U.S smartphone industry, given that the global

market, both in terms of the major players involved and the types of devices that are sold, is

quite different from the U.S. market. While we understand that every player in the U.S.

market also has a global presence, as representatives of Samsung, we feel it’s more

important to analyze how we can improve ourselves in the U.S, as they account for 55.1

percent of the worldwide mobile phone market.

The smartphone industry consists of all companies that manufacture and sell

smartphones to consumers. This industry is a massive, fast paced environment where

products are constantly updating and changing. It is characterized by quickly evolving

technology and designs, short product life cycles, aggressive pricing, rapid imitation of

product and technological advancements, and highly price-sensitive consumers between

the ages of 18-49, who have at least some college education, and make $50,000 or more

annually.

Through our industry and environmental analysis we were able to identify some

major opportunities and threats prevalent in the smartphone industry. The areas of

opportunity include cloud computing, personal health management, the creation of less

expensive devices and the development of new operating systems. The major threats in the

market include rapid technological changes, the decline of the new user market base, a wide

variety of imitations and substations and numerous barriers to entry.

Companies can solve these problems by focusing their attention on innovation,

research and development, and getting to really know and think like their consumer market

base so they can produce products that fit their current and future needs. Firms need to

develop ways highly differentiate themselves and create a strong brand loyalty. While there

are numerous barriers to entry, the rapid growth of the market provides opportunities for

companies that have sufficient capital and thriving innovation to enter the market.

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This report will focus solely on the U.S smartphone industry, given that the global

market, both in terms of the major players involved and the types of devices that are sold, is

quite different from the U.S. market. While we understand that every player in the U.S.

market also has a global presence, as representatives of Samsung, we feel it’s more

important to analyze how we can improve ourselves in the U.S, as they account for 55.1

percent of the worldwide mobile phone market.

Industry Overview

The smartphone industry consists of all companies that manufacture and sell

smartphones to consumers. This industry is a massive, fast paced environment where

products are constantly updating and changing. It is characterized by quickly evolving

technology and designs, short product life cycles, aggressive pricing, rapid imitation of

product and technological advancements, and highly price-sensitive consumers (Aviram,

2010)between the ages of 18-49, who have at least some college education and make

$50,000 or more annually [see Appendix A].

The Problems

The nature of the smartphone industry carries with it the continuous problems of

short product lifecycles, rapid technological advancements, a decreasing new user market

base, a large presence of imitations and substitutions, and numerous barriers of entry –

such as stiff competition and strong brand loyalty. These problems require companies to be

constantly and consistently ahead of current trends and consumer demands in order to

produce the “latest” products in a timely manner.

The Objectives

In order to combat the problem of rapid technological changes, companies need to

focus their attention on innovation, research and development, and become so attuned to

consumer characteristics and values that they can predict their wants and needs ahead of

the consumer. When addressing the issue of the declining new user market base, companies

can produce smartphones geared toward the demographics of those who aren’t in the

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current market (those who are 65+; those with a high school diploma or less; and those who

make under $50,000 annually). In regards to a larger presence of imitations and

substitutions, firms need to develop ways to make switching costs higher. Just as Apple has

effectively done by creating an app store, operating system, and software programs that can

only be used by Apple products. Thus, the consumer would have to make a significant

sacrifice if they wanted to substitute their iPhone for another smartphone. While there are

numerous barriers to entry, the rapid growth of the market provides opportunities for

companies that have sufficient capital and thriving innovation to enter the market (Aviram,

2010).

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Market Overview

Companies

Some major players dominate the smartphone industry, but because the Android

operating system is open-sourced, the door is open for any number of no-name

manufacturers to compete alongside the industry’s leaders. Those leaders include Samsung

Electronics, Apple Inc., LG Electronics Inc., and Motorola Solutions Inc.

Samsung Electronics

According to the Economist, in 1993 Chairman Lee Kun Hee changed the way

Samsung was doing business from focusing on cost saving efforts to providing more unique

products. This helped catapult the company to be one of the top global brands in the mobile

phone market. From 1994 to 2000 Samsung was determined to be the best of the best in its

industry of home electronics and wireless devices. During this time Samsung moved its

design center from the small town of Suwon to Seoul, the capital of South Korea. The

company invested in hiring the design firm IDEO in the U.S., implemented the Innovative

Design Lab of Samsung, and hired designers to follow the trends in cosmetics, fashion

houses, and design consultancies to stay on top of the current trends around the world

(Pederson, Samsung Electronics Co., Ltd, 2010).

This shift from cost saving efforts to providing more unique products really paid off

for Samsung. In 2004, Samsung won a total of 33 awards at top design contests in the U.S.,

Europe, and Asia. From 2003 to 2012, Samsung’s revenue and net income steadily increased

almost every year. The company’s net profit margin has always stayed above seven percent

with the average being around 9.02 percent (Pederson, Samsung Electronics Co., Ltd, 2010).

Samsung recently began to focus on the green technology and digital health markets

as ways to differentiate its products. The new Samsung Galaxy S5, which launched in April

of 2014, integrated a heart rate sensor that coordinates with its S Health application,

creating a unique personal fitness tracker. The S Health app comes with a pedometer and

can constantly track the user’s health condition, walking distance, calories burned off,

speed, and duration of activity (Pederson, Samsung Electronics Co., Ltd, 2010). This is very

attractive to consumers, who are looking to receive more from their smartphones. Today

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not only do customers want their smartphones to offer the basic talking and texting

capabilities, but they want to be able to use the Internet, play games, and have the ability to

reach their personal health goals.

In the Boston Consulting Group’s list of Most Innovative Companies, Samsung

ranked number two in 2013, up from number 11 the previous year. In December of 2013

Samsung had 26.1 percent of the US’s smartphone subscriber market share and in 2012,

Samsung had sales of $191 billion and around 90,000 employees (Lella, 2014) (Pederson,

Samsung Electronics Co., Ltd, 2010).

Apple Inc.

Apple has dominated the consumer electronics industry as well as the smartphone

industry because they have established a strong brand affinity and focuses on five main

areas when developing products: usability, simplicity, creating an “experience,” staying

ahead of its competitors, and most notably, reinvention. Apple doesn’t invent new products;

it just makes them better (Bajarin, 2012).

In 2001 Apple came out with the iPod, which revolutionized the way people listened

to music – consumers could now carry an entire library of music on one device. However, it

wasn’t the technology that made the iPod the number one selling mp3 player, it was its

sleek design and notable features. In April of 2003, Apple introduced the iTunes Music Store

which allowed users to organize their music library and purchase new music all in one

place. Both of these notable successes added in the development of the iPhone, which came

out in January of 2007. The innovation of the iPhone revolutionized the smartphone

industry.

In Boston Consulting Group’s list of Most Innovative Companies, Apple has ranked

number one since 2005. In December of 2013 Apple had 41.8 percent of the U.S.

smartphone subscriber market share and in 2012 Apple had sales of $170.9 billion and

around 80,000 employees (Lella, 2014) (Pederson, Samsung Electronics Co., Ltd, 2010).

LG Electronics Inc.

LG has been a lead innovator of the electronics and mobile industry. In 1997, it came

out with the world’s first CDMA digital mobile handset; the company provided the

technology to Ameritech and GTE in the US. In 2005, LG became the fourth largest supplier

of wireless phones worldwide. In the U.S., LG has been rated the 25th most innovative

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company in 2013, down from seventh in 2010. In December of 2013 LG had 6.6 percent of

the U.S.’ smartphone subscriber market share and in 2012, LG had sales of about $48.4

billion and 36,000 employees (Lella, 2014) (Pederson, Samsung Electronics Co., Ltd, 2010).

Motorola Solutions Inc.

Initially Motorola created car radio receivers, however, in the 1970’s the company

changed its focus and began investing in data communications hardware by acquiring

Codex and Universal Data Systems. By acquiring these companies, Motorola was able to

begin developing cellular phones and in 1985 sales of its cellular systems had taken off.

(Epperson, 2013). By 1987, Motorola officially created its last radio and focused on its

cellular phone manufacturing. In 1996, Motorola became China’s main provider of pager

technology.

Motorola’s RAZR cell phone, which came out in September of 2004, was very well

received by consumers, but the company didn’t manage to gain any ground against its main

competitor Nokia. Motorola has since been struggling to acquire market share within the

handset and wireless device business. In 2012 Motorola had sales of about $8.7 billion

dollars and 21,000 employees (Pederson, Motorola Solutions Inc., 2010).

Customers

The consumer demographics that makeup the smartphone industry includes those

aged 18 to 49, who have at least some college education and earn around $50,000+ annually

[see Appendix A].

Consumer spending in wireless devices is what highly influences capital and

business spending on industry products. In 2009, industry performance suffered drastically

when consumer spending decreased due to the recession of 2008, causing revenues from

the industry as a whole to plummet about 23 percent (down to $31.9 billion from $41.5

billion). Beginning in 2011, revenues began increasing at a rate around 0.1 percent, and in

2014 revenues are expected to reach $31.8 billion once again (Kahn, 2014)

Demand for mobile devices is determined by the timing and success of new product

introductions, price of the product and consumer spending (Kahn, 2014). Prices are

typically higher for new products and tend to fall as the volume of consumption grows and

competition rises. Although consumer demand has been pushing for highly innovative

products at very low prices, it is difficult to do so for smartphones because of their PC-like

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capabilities and highly innovative designs, specifically products offered from top companies

such as Samsung and Apple.

Consumers are increasingly demanding services and devices that facilitate mobility and

connection to 4G and Wi-Fi networks. Constant growth in the number of mobile subscribers

and in-network users helps to increase the construction of additional network capacity and

new infrastructure, such as cell towers (Kahn, 2014).

As the U.S. economy keeps recovering, consumer discretionary spending will also

increase on electronics, such as mobile phones. From now to 2019, consumer spending is

forecasted to increase at an average annual rate of three percent. It’s expected that

consumer demand for newer technologies will continue to rise, making it essential for

companies to increase their investments in research and development, partner with

companies that own equipment pertinent to the industry, and make vital acquisitions

within the U.S. and globally (Aviram, 2010).

History of the Smartphone Industry

In 1994, IBM and BellSouth introduced a combination phone and PDA called the

Simon Personal Communicator. Often publicized as the first smartphone, Simon was costly

and heavy. A decade later, the smartphones became small and powerful enough to be widely

used. Introduced in 2002, and due to its focus on e-mail, the BlackBerry became the popular,

corporate smartphone, accumulating a huge following over the years. In 2007, Apple

changed the industry forever with the introduction of the iPhone (PCMag). Today, in order

to qualify as a smartphone, the device must have at least a three-inch touch screen and be

able to download apps from an online store (PCMag).

Google’s Android operating system is open-sourced, meaning it's free for device

manufacturers to use and manipulate. This makes the barriers to entry almost nonexistent,

opening the door to a number of no-name manufacturers to produce smartphones that

compete with the industry’s leaders. Two years ago, no one had heard of companies such as

HTC or Kyocera, LG had virtually no smartphone presence, and Motorola had been left for

dead. Today, they're at the industry's frontline (Goldman, Android and Qualcomm are the

new Wintel, 2010).

In 2010, more than 250 million smartphones were sold worldwide and the U.S.

accounted for 23 percent of the total world smartphone market. Last year (2013), one

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billion smartphones were sold in the U.S., accounting for 55.1 percent of the worldwide

mobile phone shipments (Zeman, 2014).

The Smartphone

A smartphone is a mobile electronic device that runs an advanced operating system that is

open to installing new applications, is always connected to the Internet, and which provides

very diverse functionality to the consumer (Aviram, 2010). The current product life cycle of

a smartphone is around six to nine months, a drastic change from 2007 when the average

shelf life was about three years. The cycle of the smartphone directly corresponds to the

demands of the consumer, whom continually want the latest and greatest products

(Goldman, Your new smartphone is already a dinosaur, 2011).

However, the advancements in technology and software make it possible for companies to

meet this demand. Most notably, the introduction of the Android operating system, which

allowed device manufacturers the ability to load the ready-made software onto their

phones instead of paying a team of engineers to develop a proprietary operating system

(Goldman, Your new smartphone is already a dinosaur, 2011). Before the Android system,

mobile devices typically had hardware integrated with custom operating software, which is

how each company was able to differentiate themselves (Goldman, Android and Qualcomm

are the new Wintel, 2010). Now, in order for companies to stay current, they have to be

feature and design innovators.

Today, for the first time ever, a standard platform is emerging. That standard is called the

Qualcomm-Android standard, or "Quadroid" as PRTM calls it. Quadroid smartphone’s have

been likened to the Windows-Intel merger, or “Wintel,” in that most smartphones run the

Android operating system, and more than three quarters of those devices have Qualcomm

chips embedded in them. Quadroid devices' software and hardware is essentially a

commodity in this industry, they're very similar on every phone, making differentiation a

very difficult task (Goldman, Android and Qualcomm are the new Wintel, 2010). This new

standard has freed up smartphone manufacturers to focus most of their attention on

marketing and designing top-of-the-line products. As a result, smartphone manufacturing

cycles have doubled in speed in the past two years to just over four months, according to

industry consultancy PRTM. That means device makers can produce products at an

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incredibly rapid pace, taking their smartphone from concept to store shelves in a relative

blink of an eye (Goldman, Your new smartphone is already a dinosaur, 2011).

This speedy product lifecycle has become known as “Android’s Law.” Similar to

Moore’s law, which states that microchip manufacturers can double the number of

components on a piece of silicon every two years, Android’s Law observes that the

popularity of Android rapidly increases the pace at which manufacturers can build and

begin selling new smartphones (Tuttle, 2011). Analysts agree that the market cycle will stop

shortening at some point because consumers can't absorb new products as fast as they’re

produced (Goldman, Your new smartphone is already a dinosaur, 2011). But for now, this

trend is predicted to be on the rise for quite some time.

(Goldman, Your new smartphone is already a dinosaur, 2011)

Life Cycle Stage of the Smartphone Industry

Currently, the smartphone industry is in its mature stage. The lifecycle stage an

industry is in is characterized by its industry value added (IVA), which is a measure of the

industry's contribution to the U.S. economy. The smartphone industry’s IVA is growing

slower than GDP. This is mainly because of a slowdown in the growth in the number of

companies entering the industry and segmented product lines. The IVA is expected to

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increase at an average annual rate of 0.2 percent in the years from 2014 to 2019, while GDP

is expected to increase at an annualized rate of 2.7 percent. Below is a graph provided by

IBIS World, representing the revenue outlook for the smartphone industry from years 2015

to 2020 (Kahn, 2014).

(Kahn, 2014)

One of the main reasons why IVA growth has been so slow is because of the

recession that hit in 2008, which caused consumer demand and profit margins to decrease

while high input costs remained. In addition foreign countries have lower wage costs than

the U.S., which gives manufacturers abroad an advantage by being able to price their

products lower. This in turn puts pressure on U.S. firms to lower their prices in order to stay

competitive, subsequently cutting profits (Kahn, 2014).

However, increasing demand for smartphones will help increase industry profit

margins, especially over the next five years. Even with this boost from demand, IVA will still

grow at a slower rate to GDP, which indicates the industry is mature (Kahn, 2014).

The number of entrants to the industry is expected to slightly increase at an average

annual rate of 0.9 percent in the years from 2015 to 2019. This is because few players are

expected to enter the market and major firms are consolidating to cut costs and remain

competitive against foreign companies. As firms grow through acquisitions, they achieve

economies of scale, and thus are able to negotiate for cheaper inputs and better money

allocation to put towards product research (Kahn, 2014).

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Advances in smartphone technology and the growing demand for smartphones have

helped lead to new products that in turn drive industry growth. The U.S. is often at the

forefront of technological advancements in this industry, especially because of the high

share of research and development costs incurred. IBIS World forecasts rapid product

introduction in the next five years, contributing to further the growth of the smartphone

industry. However, even with rapid product innovation, the products in this industry fall

under clearly defined segments, which are a sign of a mature industry (Kahn, 2014).

Typical Benefits Sought By Consumers

The smartphone industry has grown a lot since 2008, in part because of the

recession. During the recession in 2008 customers began cutting back on discretionary

spending and instead of cutting their wireless device lines, they decided to cut their

landlines. As a result smartphone acquisition by customers grew drastically. It is estimated

that revenue for the smartphone industry will grow to $204.7 billion in 2014 and is

projected to reach $281.3 billion by 2019 (Kahn, 2014).

Typical benefits sought by customers within the smartphone industry are for

companies to bring new and innovative products to the market quickly. Trends currently

occurring within the smartphone industry are wireless connectivity – in which it is expected

to be able to connect wireless devices to one another seamlessly (Epperson, 2013). Also,

even though smartphone users expect new and innovative products to come to the market

constantly, they too expect the smartphones to be less expensive than the previous phone

purchased. This is much more plausible for companies to achieve in developing countries

(where labor costs are low), thus the cost of selling their products can be cheaper. In the

U.S., labor costs are high which makes it is less achievable for companies to sell better

phones at lower prices.

Another item customers search for within the smartphone industry is to have a

better infrastructure network. During the past five years, the industry has been

transitioning from primarily providing voice services to increasingly focusing on providing

data services. IBIS World states that the transition to fourth-generation (4G) wireless data

services and the long-term evolution (LTE) standard, will further transform this industry

into one that primarily delivers broadband connectivity. Also, Japanese wireless carrier

Softbank's recent acquisition of Sprint, and Sprint's recent purchase of Clearwire, and T-

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Mobile's acquisition of prepaid carrier MetroPCS, indicates that the industry is in the midst

of a consolidation phase. Over the next five years, Sprint and T-Mobile are anticipated to

bolster their competitive positions against AT&T and Verizon through acquisitions and the

rapid expansion of their 4G-network coverage (Kahn, 2014).

Additionally, consumers demand to be able to conduct services via a smartphone

(mobile banking, shopping, paying bills, GPS, social media etc.), thus pushing the need for

faster mobile Internet connections. Today not only do customers want their smartphones to

offer the basic talking and texting capabilities, but they also want to be able to consolidate

their devices (GPS, camera, video camera, laptops, etc.), use the Internet, play games, make

purchases, and use their phones to help them reach their personal health goals. Below the

two graphs depict IBIS World’s predictions for the number of mobile Internet connections

and percentage of services conducted online within the U.S. from 2005 to 2019. The

Internet connections and percentage of services conducted online will be increasing yearly

at pretty large rates (Kahn, 2014).

(Kahn, 2014)

Wireless Service Providers

The main wireless service providers in the smartphone industry are Verizon

Wireless, AT&T Inc., Sprint Nextel Corporation, and Deutsche Telekom AG – which operates

in the U.S. market under the T-Mobile brand name. These three companies purchase the

majority of smartphones from all smartphone manufacturing companies in the U.S., such as

Samsung, Apple, LG, Motorola, and Nokia. After purchasing the smartphones through

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contracts made with the smartphone manufacturing companies, the smartphones are sold

to the end consumers via contracts made with them. The most prevalent contract offered to

the end consumer by these companies is a two-year contract. With these two-year contracts

the phone is normally sold at $250. If the end customers decides to only purchase the phone

(with no contract) then the phone is sold at retail value, usually running from $500-$700

(Hoovers, 2010).

Marketing Strategies in the Smartphone Industry

Product differentiation in each business unit is a big marketing strategy by most

major companies in this industry. For example, Samsung has differentiated its Galaxy S

smartphone models and GALAXY Tab tablets by making them appear to be better than the

rest. Apple has done the same with its “i” brand, such as the iPhone and iPad.

Making sure price, quality, and the performance of products are top-notch, are great

marketing strategies to keep and retain brand loyal customers. Apple’s app store and

Samsung’s app store has definitely helped in keeping and retaining customers. Brand

loyalty is big, thus it’s very important to make sure that the products companies produce

are priced correctly, have impeccable quality, and perform as promised. “Nokia states that

mobile device manufacturers also compete with each other on the basis of their solutions

portfolio, user experience, design, operational and manufacturing efficiency, technical

performance, distribution strategy, and brand” (Hoovers, 2014). All these factors are

watched closely to keep ahead of the rest within the smartphone market.

Overview of Samsung and its Dominant Strategies

Samsung has focused on manufacturing and marketing consumer electronic

products across the world. Samsung has a comprehensive product portfolio and

geographical reach, but has also gained in its financial stability. Samsung Electronics

reported record overall sales and net income in 2010 The company's three primary

strategies are to solidify its market leadership by focusing on product differentiation in each

business unit; identify businesses that will sustain growth over the next five to ten years;

and prepare management to anticipate and respond to business risks during times of global

market uncertainty (Epperson, 2013).

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Sales of the company's smartphone product line rose by 23 percent in 2010 from

2009. Samsung’s strategy of supporting products with software and services has paid off in

increased sales and market share for its smartphones. The company has focused on more

than simply increasing sales of its flagship Galaxy S smartphone models and GALAXY Tab

tablets (both of which carry the Android operating system). Samsung’s app store, which

opened in mid-2010, reached its 100 millionth download in early 2011. The company

strongly believes it was because of its high support of Samsung Apps with the promotion of

its smartphones. The Samsung app store includes more than 13,000 applications and

services tailored to meet local needs in 120 countries. By strongly supporting content and

services to its smartphone devices, Samsung Electronics is taking direct aim at Apple's

market dominance (Epperson, 2013).

The company has also been the leader in the worldwide memory market for more

than a decade and has a significant share of the global market for CMOS image sensors for

smartphones. Because of this, Samsung also produces a large number of chips used for their

smartphones. Its strategy revolves around developing memory products that use less

power, considered essential to powering smart mobile devices and more user-friendly

products. In order to maintain leadership in the chip-making business, Samsung Electronics

has spent millions on boosting production of system LSI semiconductors. The company has

formed a number of alliances and partnerships with other high-tech companies, helping to

increase its market dominance. The partnership with IBM Microelectronics allows the

company to share chip-making technology. Samsung continues to invest in both LCD and

OLED technology and has developed a new type of display technology called electrowetting.

This technology has faster response times and uses less battery power than existing

displays used in e-readers, mobile phones, media players, and similar mobile devices

(Epperson, 2013).

In 2009 the company began to jointly develop solid-state drives (SSDs), which are

faster and more energy efficient than hard-disk drives and have become the storage

technology of choice for smartphones and other wireless devices. Samsung is also investing

in outside industries to greater diversify their product offerings, internal hardware

components, and further development of current technologies. In 2011 Samsung bought the

Nexus division of cardiac point-of-care testing products company, ITC Nexus Holding and

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earlier in the year, Samsung bought diagnostic ultrasound manufacturer Medison. These

purchases are part of the company's goal to inject about $1 billion into its strategy to grow

as a healthcare technology player, which it has already started doing by way of their new

Samsung Galaxy S5 that launched in April of 2014. The smartphone has an integrated heart

rate sensor, and comes with the S Health app that works as your own personal fitness

tracker (Epperson, 2013).

Revenues for the industry are expected to grow by 2.1 percent annually from 2014

to 2019 (Kahn, 2014). In September 2013 Samsung’s quarterly income statements revenue

was $188.37 billion and net income was $21.72 billion (Epperson, 2013). This means

Samsung’s net profit margin was 11.5 percent. Apple’s revenue was $37.47 billion and net

income was $7.51 billion, making Apple’s net profit margin 20.04 percent, for the same

quarter. Even though Samsung is taking in more money from sales, Apple seems to be

getting an 8.5 percent higher return on every dollar. Below is an image depicting revenues

for Samsung, Apple, LG, and Motorola from 1990 to 2014 (Epperson, 2013).

(Epperson, 2013)

Samsung and Apple are the biggest rivals in the smartphone industry and need to keep

watch of one another’s actions in order to stay ahead in the market.

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Environmental Analysis

Competitive Analysis

The smartphone industry is a market driven by speed. New products are constantly

being introduced in order to keep up with how quickly they become outdated. Demand is

driven by the use of wireless communications services. The profitability of individual

companies depends on efficient operations and bringing new products to market quickly.

Large companies enjoy economies of scale in purchasing raw materials, components, and

manufacturing equipment. Smaller companies can compete effectively by specializing in

niche products or components. The U.S. industry is highly concentrated: the 50 largest

companies account for about 90 percent of the industry’s revenue (Hoovers, 2010).

Consumers make smartphone buying decisions based on a large number of factors.

More and more consumers are looking for their smartphone to replace many of the other

electronic devices that they previously carried around (cell phone, watch, camera, video

camera, pedometer, laptop, etc.), so the number of features in the phone is often an

important buying decision. Some of characteristics that consumers consider include

aesthetics and features, hardware and software functionality, wireless service options, and

most importantly the price.

Economic Factors

As the US economy faltered and unemployment rapidly increased, consumers

became more selective about spending disposable income. In 2009, consumer spending

declined 1.6 percent, and luxury items, such as mobile phones, were some of the first

expenditures to be cut from personal budgets. In 2011, the economy showed signs of

improvement as consumer fears subsided, thereby stimulating consumer spending. As

recovery slowly gained momentum, consumers were ready to invest in the latest

electronics, and industry revenue grew 6.5 percent during the year (Kahn, 2014).

In 2010, strong competition and declining revenue hurt industry profit. Profit

margins fell from their peak of 5.7 percent of revenue in 2008 to 3.4 percent in 2010 due to

significant overseas competition that resulted in a decline in average unit selling prices and

a loss of market share to imports. However, from 2009 to 2014, demand from wireless

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telecommunications carriers increased, stimulating industry demand. Moreover, the

increase in demand from downstream industries has helped bolster revenue and improve

average industry profit margins. Rebounds in demand, combined with the off shoring of less

profitable facilities and outsourcing of labor-intensive component processes, are expected

to cause profit margins to improve 4.2 percent in 2014 (Kahn, 2014).

Smartphone manufacturers will benefit from a surge in demand as the economy

recovers and consumer sentiment rises, and increasing demand from downstream

industries. Moreover, as the unemployment rate decreases and per capita disposable

income rises, consumers are expected to increase discretionary spending, particularly on

electronics such as smartphones. Growing consumer demand for high-definition

broadcasting technology and the expansion of 3G and 4G wireless networks has helped

reverse downward revenue trends. In line with rising consumer spending, new technology

purchases will also increase during this five-year period, helping to buffer expected losses

in revenue to foreign competitors (Kahn, 2014)

Despite positive forecasts, imports are expected to increase 4.7 percent and reach

$80.2 million in 2019, and will continue to threaten domestic manufacturers, which are

expected to lose market share in both domestic and foreign markets. In addition, downward

pressure on prices will increase as consumers choose from an increasing array of

competing technologies. To alleviate these constraints, some companies will cut

unprofitable lines in order to concentrate on fewer, higher-margin products, while others

will likely outsource manufacturing abroad to focus their efforts on research and

development and high-end products. High-end products are expected to continue to be

domestically produced and will account for a portion of the 5.4 percent increase to $10.2

million forecast to be earned from exports in the five years to 2019 (Kahn, 2014).

Legal Factors

The smartphone industry is governed by an array of product regulatory, consumer

protection, environmental and safety laws. Electronic firms have to develop policies to

abide by environmental regulations and any radio-transmitting devices (such as a

smartphone), must be approved by the FCC. Additionally, any sales in foreign countries

must go through the approval processes in those respective countries as well. Furthermore,

the majority of the industry’s leaders hold patents on numerous parts of the smartphones’

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hardware and software, which creates the potential for infringement lawsuits (Aviram,

2010). In regards to environmental laws, marketers should qualify general claims with

specific environmental benefits. Qualifications for any claims should be clear, prominent,

and specific. If a qualified general claim conveys that a product has an overall

environmental benefit because of a special attribute, marketers should analyze the trade-

offs resulting from the attribute to prove the claim (Bureau of Consumer Protection, 2012).

Technological Factors

Constant technological advances characterize the smartphone industry. Because of

the rapid pace of product development, wireless equipment manufacturers frequently

invest in suppliers who can provide multiple technologies for use in end-products. For

example, Apple's iPhone introduced the idea that phones can do much more than handle

calls and messages. Chipsets are particularly important for consumer devices such as

smartphones, tablets, and MP3 players.

Devices that can handle faster network speeds are a key area of focus for research

and development. Mobile phone users across the globe are rapidly switching over to

smartphones as handsets become more affordable and 3G and 4G networks advance. Other

recent advances in wireless technology include waterproof phones that can take ultra-high-

definition video, as well as phones with all-glass exteriors. Additional innovations include

noise-canceling technology, longer battery life, and wearable technology such as

smartwatches and smartglasses (Epperson, 2013).

The number of mobile Internet connections represents the total number of

consumers that have broadband Internet-capable devices and subscriptions that include

data plans. As the number of mobile connections increases in 2014, demand for mobile

communication equipment from wireless telecommunication carriers will increase as well,

providing a potential opportunity for the industry (Kahn, 2014). As does cloud computing,

which entails the use of remote databases to store digital information, which presents

growing opportunities for wireless equipment manufacturers. Smartphones, tablets, and

other mobile devices can use "the cloud" to handle video, music, and data storage.

Consumers and businesses are increasingly turning to cloud computing to reduce their

reliance on the risks associated with physical server storage (Epperson, 2013).

Social and Cultural Factors

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Smartphone manufacturers rely heavily on components from foreign suppliers in

low-wage countries, which means any disruption in the supply chain can profoundly impact

production. In addition, companies may be subject to increasing public pressure regarding

the working conditions in factories where those components are made. Human rights

groups have alleged low wages, long hours, and unsafe conditions in the factories of some

electronics manufacturing service providers. Apple and other companies have responded by

implementing third-party audits of their manufacturing contractors' factories (Epperson,

2013).

U.S. personal income, which drives consumer demand for smartphones, rose 4.1

percent in January 2014 compared to the same month in 2013 (Epperson, 2013). Consumer

spending rates influence capital investment and business spending on industry products.

When consumers spend more, advertisers and entertainment financiers are also more likely

to spend, boosting downstream industry revenue and demand for industry products.

Consumer spending is expected to increase during 2014 (Kahn, 2014).

Growth in the telehealth market (the use of electronic information and

telecommunications technologies to support long-distance clinical health care, patient and

professional health-related education, public health and health administration) is predicted

to increase to $1.9 billion in 2018 from $240 million today, an annual growth rate of 56

percent (Graham, 2013). Telehealth technologies include videoconferencing, the Internet,

store-and-forward imaging, streaming media, and terrestrial and wireless communications

(Lustig, 2012).

22


Industry Opportunities and ThreatsThrough our industry and environmental analysis we were able to identify some

major opportunities and threats prevalent in the smartphone industry. The areas of

opportunity include cloud computing, personal health management, the creation of less

expensive devices and the development of new operating systems. The major threats in the

market include rapid technological changes, the decline of the new user market base, a wide

variety of imitations and substitutions and numerous barriers to entry [see Appendix B].

Opportunities

Cloud Computing

Consumers are becoming increasingly concerned with convenience and it’s foreseen

that smartphones will soon be able to predict how to make their user’s lives just that.

According to Gartner, smartphones will outsmart their users by 2017 with the use of the

personal cloud computing. Cloud computing, which entails the use of remote databases to

store digital information, presents growing opportunities for the smartphone industry and

their users. Through the use of technology, it is predicted that applications will acquire

knowledge over time and get better with improved predictions of what users need and

want in real time. The first step will occur automatically, helping with mundane tasks and

saving the user time. As confidence of the smartphone increases, consumers are expected to

gradually become more accustomed to allowing more apps and services to take control of

other aspects of their lives – this will be the era of cognizant computing (Meulen, 2013).

The cloud and the data stored on the cloud will provide them with the

computational ability to make sense of the information they have so they appear smart.

There are four phases to reach a complete personal cloud experience; Sync Me, See Me,

Know Me, Be Me. The first two are currently occurring, with the latter still to come. Phase

“Sync Me” stores copies of personal digital assets and keeps them in sync across all end

points and contexts. “See Me” knows where the user is and has been on the Internet and in

the real world. It understands the user’s mood and context to better align services. The still

to come, “Know Me” phase understands what the user wants and needs and proactively

presents it. And the final phase, “Be Me” acts on the user’s behalf based on learned or

23


explicit rules. It is expected that over the next five years, cognizant computing will become

one of the strongest market forces affecting the entire ecosystems and value chain across IT.

Consumers tend to give up a lot for convenience as long as they are getting enough in

return. The era of personal cloud is empowering users as well as devices to get access and

share more and more data. Over the next five years, the data that is available about people,

their likes and dislikes, their environment and relationships will be used by their devices to

grow their relevance and ultimately improve their lives (Meulen, 2013).

Personal Health Management

With the recent growing trend of personal health and wellness management,

smartphone users have been utilizing their devices to help them achieve healthy lifestyles.

With the mobile information technology, various opportunities arise through personalized

applications that have been developed for the user to manage their health more accurately

at any time and location. Caloric intake, nutritional information, and exercise activities can

be quickly and accurately recorded and analyzed with the click of a photo or touch of a

button. Personalized applications can also provide useful recommendations to users with

specific needs, such as a specific food or allergy disease or weight control (Chang & Hsu,

2014).

Wearable technologies that interface with smartphone applications are an

increasing trend that is not expected to disappear any time soon. These Internet-connected

wristwatches and head-mounted devices are publicized as the next big thing in technology.

Leading the fledgling industry are fitness gadgets that track and gather biometric data from

steps taken, calories burned, and other measurements of activity. Fitness related

accessories are expected to lead the industry through 2018 because of their ease-of-use and

affordable low prices. However, in the future the wearable devices do have the risk of

becoming obsolete with technological innovation that would allow smartphones to perform

like these gadgets. Yet for the next few years, these types of devices and applications make it

virtually effortless to achieve personalized health management (Chang & Hsu, 2014).

Less Expensive Smartphones

The segment of the smartphone market that caters to high-end smartphone users

has reached its’ plateau. In the years to come, the growth of the industry is expected to be

based on significantly decreased prices. As smartphone penetration moves from the early

24


adopters to mass-market and laggard consumer segments, the smartphone as a product will

be less dependent on technical superiority, and more dependent on reliability and value.

This indicates that new classes of smartphones will arise. The category will revolve around

low cost smartphones with less than top-end specifications, but they will still provide a

great experience. The price range of these mid-grade phones will span from roughly $250 to

$400. According to ABI, the low cost smartphone market is estimated to more than triple in

the amount of devices sold between now and 2018 (Shaughnessy, 2013).

Currently, smartphone manufacturers are trying to tap into emerging markets by

developing low-cost and low-tech versions of their smartphones. Companies are racing to

meet demand for more affordable wireless phones by offering low-resolution screens, less

expensive chips, fewer buttons, and less built-in memory. Several manufacturers have

developed smartphones priced under $200 (Shaughnessy, 2013).

New Operating Systems

Smartphone operating systems are currently dominated by Apple (iOS) and Google

(Android). However, there are a few new players on the rise: Intel and Samsung (Tizen),

Jolla (Sailfish), Mozilla (Firefox OS). These Linux-based operating systems are gaining in

speed and have the potential to make a major dent in the current market leader’s share.

This trend will not subside or revert back to the way it was, but rather it will continue for

years to come. There is also the upcoming feature of running dual or multiple operating

systems on a single device, not simultaneously, yet it allows the user to have the choice of

how their device functions. The opportunity for the smartphone industry lies in the

innovation of main user-facing software platforms and the real-time operating system.

Companies that can develop the next cutting-edge open-source operating system stand to

become a substantial competitor with Apple and Google. However, if they are unable to

compete by becoming the new Samsung or Apple, they may be able to dominate by finding

their own niche in their own global tribe (Shaughnessy, 2013).

Threats

Rapid Technological Change

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The smartphone market is characterized by the rapid introduction of new

technologies as well as short product lifecycles. The pace of innovation often leads to

aggressive price-cutting, which in turn can pressure overall margins. Producers must

introduce state-of-the-art technologies on a regular basis to compete effectively (Hoovers,

2014). There is a high rate of technological change in wireless communications networks

that is not expected to subside any time soon. These defining characteristics of the industry

are short product lifecycles along with high investments in research and development and

technological infrastructure. A higher investment in technology, design, and features will

price these services higher and it is these collective costs that will determine which next

generation technology gains sufficient momentum and penetration (Kahn, 2014). With a

medium level of volatility, new technologies can be taken up quickly resulting in revenue

growth, however, a lull in demand is sure to follow. Products can become redundant or they

can lower the demand for existing products by almost cannibalizing a product. The industry

can regulate this threat by influencing the introduction of new technologies and the

consumers’ ability or willingness to conform to the new technologies (Kahn, 2014).

Decline in New User Rate

Out of the approximate 315 million people in the U.S. (U.S. Census Bureau, 2014),

159.8 million of them owned a smartphone by the end of January 2014 (Lella, 2014).

Growth in smartphone penetration has risen seven out of ten Americans overall (70

percent); for the first time, a majority of Americans of all age groups own smartphones

(Nielsen, 2014). However, the demographics of those who don't yet have smartphones, are

older Americans 65+, those who have a high school diploma or less and those who make

less than $50,000 annually [see Appendix A]. These mobile users will be more likely to buy

cheaper smartphones and spend less money on apps and commerce than existing

smartphone users. They will also likely be a less valuable demographic for advertisers. This

will lead to a sharp slowdown in the growth rate of smartphone sales, which will force

companies to become more dependent on additional sales to existing users (replacements,

upgrades, add-ons, etc.), rather than sales to new smartphone users (Danova, 2014).

Substitutions

Although the technological innovation is rapid in the smartphone market, any edge a

particular firm might obtain, whether it be technological or industrial, is diminished by

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rapid imitation. With some exceptions, smartphones from most manufacturers at any given

time have relative feature parity in many respects, making substitution relatively easy from

the consumer’s perspective (Aviram, 2010).

Additionally, the primary competitor outside of the smartphone market is the

feature phone, a mobile device that has basic functionality (voice calls, texting, etc.). The

main reason consumers chose to go with a feature phone instead of a smartphone is the

price difference of the phones. Purchasing a smartphone requires both a larger upfront cost

and higher ongoing costs for a data plan, which feature phone buyers don’t have to worry

about. Feature phone buyers may also not see value in the added functionality of a

smartphone because they already own dedicated devices that provide those features

(cameras, GPS devices, laptops, etc.). Thus, the highly elastic demand for smartphones

makes substitution a large risk (Aviram, 2010).

Threat of Entry

Barriers to entry in the smartphone industry are quite high, despite some of the

ease created by Google’s Android system. For starters, many parts of the smartphones’

hardware and software are protected by patents held by the industry leaders. Any firm

attempting to enter the market would have to have significant financial backing to deal with

any potential patent lawsuits, not to mention damages that might result if infringement is

found. The most likely outcome of litigation between large smartphone manufacturers is an

agreement to license each other’s patents, but this option is not available to new entrants

who may have limited intellectual property available in the smartphone market (Aviram,

2010). However, at the rate that technology advances, this barrier may not forever be a

problem given that patents only last for 20 years.

Moreover, because companies like Apple and Samsung dominate the smartphone

market, brand loyalty is another potential barrier to entry for any new competing firm.

Apple, specifically, has created a vast and exclusive brand community, in that all of its

products solely work together, making switching costs very high. Entering the market and

becoming a relevant player, requires that a potential competitor convince existing

customers that they will provide a better service than the existing brand, and that is difficult

to do (Aviram, 2010).

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Samsung Evaluation

SWOT Analysis

Samsung focuses on manufacturing and marketing consumer electronic products

across the world. The major strengths of Samsung are its comprehensive product portfolio

and geographical reach, but the company has also gained in its financial stability. Internally,

the company is weak in the areas pertaining to legal proceedings, and the decline of both

inventory turnover and its operational performance. Samsung does have promising

opportunities with the steadily increasing demand for smartphones, the introduction of

new products, its strategic collaborations, and a positive market outlook to ensure higher

revenue. Yet the company is confronted with the threats of expanding counterfeit products,

strong competition, and the always fluctuating foreign currencies (Global Data, 2013).

Strengths

Geographical Reach

Wide geographical operations lead to greater benefits, improved profit margins,

economies of scale, and recognition on a worldwide basis. The company operates in Asia,

Europe and America through 197 offices in more than 70 countries. Geographically, the

company divided its business into five regions, namely, Korea, America, Europe, Asia and

Africa, and China. For the fiscal year ended December 2011, America accounted for 29

percent of the company’s total revenue, followed by Europe (24 percent), Asia and Africa

(17 percent), Korea (16 percent), and China (14 percent). The company is associated and

partnered with leading global players in different industries such as Sony, IBM, Microsoft,

EMC, Intel, TSMC and Time Warner. Samsung operates a wide sales network across the

world. It has major sales offices in Australia, China, Hong Kong, India, Indonesia, Japan,

Malaysia, the Philippines, Singapore, Thailand, Russia, Ukraine, Kazakhstan, Austria, Serbia,

France, Germany, Greece, the UAE, South Africa, Turkey, Jordan, the US, Canada, Mexico,

Argentina, Brazil, Peru, and Panama, among others (Global Data, 2013).

Comprehensive Product Portfolio

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Samsung is one of the leading manufacturers of the electronic goods. The company

divided its business into five segments, namely, Digital Media, Telecommunication, LCD,

Semiconductor and Others. The company offers its products through eight independent

businesses, namely, Visual Display, IT Solutions, Digital Appliances, Mobile

Communications, Telecommunication Systems, Digital Imaging, Semiconductor Business,

and LCD Business. The Digital Media segment of the company manufactures color TVs,

monitors, MP3 players, DVD Players, home theater systems, laser printers, digital

camcorders, laptops and potable entertainment devices. Touch of Color TVs, all-in-one color

laser printers and 4th-generation Blu-ray disc players are a few innovative products of

Samsung’s Digital Media business division. It manufactures and sells handsets, networking

systems and other consumer electronics. The Telecommunication segment of the company

manufactures mobile phones based on next generation technology, including Mobile

WiMAX. The company provides extensive commercial mobile WiMAX services in the US,

Japan and Russia. The company reported strong sales of Galaxy S III with the expansion of

high-end (Galaxy Note/Nexus, etc.) and mass-market (Galaxy Ace/Y, etc.) model line-ups.

The Semiconductor segment of the company offers dynamic random access memory

(DRAM), static random access memory (SRAM), NAND flash memory and Solid State Drives

(SSDs), display driver IC (DDI), CMOS image sensor (CIS), mobile application processor

(AP), smart card IC and media player SoC, hard disk drives for notebook and desktop PCs,

digital camcorders, MP4 players, and a wide range of other consumer electronics and

mobile devices. Such a range of product offerings would help the company mitigate risks

(Global Data, 2013).

Improved Liquidity Position

Samsung reported improvement in its liquidity position in 2011. For the fiscal year

ended December 2011, the company reported current ratio of 1.6, as compared to 1.5 in

2010. Its quick ratio also improved marginally to 1.22 in 2011 from 1.17 in 2010. The

improvement was driven by higher growth in the company’s current assets than in its

current liabilities. In 2011, the company’s total current assets stood at KRW71, 502 trillion,

indicating an increase of 16.44 percent over KRW61, 402 trillion in 2010. Its total current

liabilities increased to KRW44, 319 trillion, from KRW39, 944 trillion in 2010. Cash from

operating activities also forms an important part of the liquidity. In 2011, the company

reported total cash of KRW22, 917 trillion from its operating activities. Strong liquidity

29


ensures financial stability and makes it possible for the company to meet its short-term

obligations (Global Data, 2013).

Weaknesses

Legal Proceedings

The company has been involved in several litigations. In April 2012, Potter Voice

Technologies filed Colorado Patent Infringement Lawsuit against the company. Potter

Voice’s lawsuit includes claims against a group of 15 defendant companies including Apple

Inc, and the company, accused of infringing Potter's U.S. Patent No. 5,729,659, which was

issued by the U.S. Patent and Trademark in 1998. In March 2012, the company, Sony

Corporation, and four other companies were sued by Graphics Properties Holdings Inc for

allegedly infringing a patent through their sale of mobile phones and other electronic

devices. The patent at issue relates to a computer graphics process that turns text and

images into pixels to be displayed on screens. The company is facing an array of litigations

by Apple Inc, for infringement of its proprietary products such as iPad and iPhone. Such

involvement in litigation affects the brand image of the company (Global Data, 2013).

Decline in Inventory Turnover

Samsung has been reporting a decline in its inventory turnover for the last two

years. For the fiscal year ended December 2011, the company reported inventory turnover

ratio of 6.50 as compared to 7 and 8.30 in 2010 and 2009 respectively. As of December

2011, the value of the company's inventory totaled KRW17, 153 trillion, reflecting an

increase of 17 percent over KRW16, 670 trillion in 2010. A decline in inventory turnover

indicates that the company required 56 days to sell its inventory on hand, as compared to

52 days and 44 days in 2010 and 2009 respectively. The increase in days of inventory on

hand indicates the company’s weak sales or ineffective buying. Such decline in inventory

turnover ratio affects the company‘s performance and raises its inventory cost such as

warehouse and material handling cost (Global Data, 2013).

Decline in Operational Performance

Samsung reported a decline in its operational performance in 2011. For the fiscal

year ended December 2011, the company reported total revenue of KRW165, 001 trillion,

as compared to KRW154, 630 trillion in 2010. The company’s operating income stood at

30


KRW16, 249 trillion, reflecting a decline of 6 percent over KRW17, 296 trillion in 2010. The

decline in operating income was mainly due to increase in the company’s operating

expenses. In 2011, its operating expenses stood at KRW148, 752 trillion, as compared to

KRW137, 333 trillion in 2010. Total expenses as a percentage of sales amounted to 90.15

percent, as compared to 88.80 percent in 2010. As a result, the company’s operating margin

declined to 9.84 percent in 2011 from 11.18 percent in 2010. Decline in operational

performance resulted in the decline in profitability. In 2011, the company reported net

profit of KRW13, 359 trillion, reflecting a decline of 15.44 percent over KRW15, 799 trillion

in 2010 (Global Data, 2013).

Opportunities

Demand for Smartphones

The company could capitalize on the growing demand for smartphones, which is

emerging as a major growth opportunity for mobile device manufacturers. As of December

2011, Samsung had 19.9 percent of the global smartphone market share. According to

industry analysts, the global market for smartphones is predicted to reach more than 650

million units (registering approximately 35 percent growth over 460 million units in 2011)

in 2012, more than 900 million units (recording approximately 35 percent growth) in 2013,

and surpass one billion by 2014. The global smartphone market is dominated by Android,

with 61 percent market share and iOS with 20.5 percent of the global smartphone market in

2012. Such growth would be determined by factors including lower product cost, improved

handset design and functionalities, the expansion of global mobile email and browsing

services, emergence of 3G and 4G network technologies, and standardization and upgrade

of operating systems. Consumer awareness about the advantages offered by these devices,

especially email and e-transactions, among others, would lead to smartphone business

growth even during tough economic times. Smartphones could find considerable demand in

developing countries, especially Asia-Pacific, besides North America. Emerging countries

including China, India and Brazil are expected to register substantial increase in

smartphone usage besides the US and the UK. (Global Data, 2013).

Launch of New Products

31


The company strives to manufacture innovative products to meet customers’

changing requirements. Launch of innovative products at regular intervals would help the

company gain new customers and increase its presence in the market. In November 2012,

Samsung introduced a next-generation 64GB embedded multimedia card (eMMC) using 10

nanometer (nm)-class process technology. In October 2012, the company launched the

GALAXY S III mini, a compact version of the flagship smartphone GALAXY S III. In August

2012, the company introduced GALAXY Note 10.1 for the US market. In May 2012, the

company launched its new Galaxy series smartphone, Galaxy S III. In May 2012, it launched

interactive Smart TV models, LED ES8000, ES7500 series, and Plasma E8000 series in India.

In March 2012, the company enhanced its GALAXY tab range with the introduction of new

Samsung GALAXY Tab 2 310. In January 2012, Samsung launched its widest range of 2012

BEE star rated split air-conditioner models in the Indian market. 39 Split AC models, with

ratings between 1 and 5, have been launched across the company’s eight air conditioner

series available in the Indian market. In November 2011, the company launched the mobile

phone, Galaxy Note, in the Indian market. The company launched the bada 2.0 smartphone.

The new version of the smartphone operating system incorporates support for near field

communications, web applications and scalable user interface. In the same month, the

company launched Wave 3 in the global markets. In February 2011, the company

introduced two compact cameras that encompass high-end technology and related features.

They offer 14 and 12 mega pixel resolution with 5X zoom capability. The company launched

the industry’s first DDR4 DRAM module utilizing a 30 nanometer (nm) class process

technology. The new module incorporates the capability to achieve a data transfer rate of

2.133 gigabits per second (Gbps) at 1.2V. In October 2010, Samsung introduced the OMNIA

7 smartphone comprising Windows phone 7 platforms across Asia and Europe (Global Data,

2013).

Strategic Collaborations

Strategic collaborations provide growth and expansion opportunities to the

company. In April 2012, the company, NeotionSA, and Fransat entered into a strategic

collaboration wherein Eutelsat Communications SA, the parent company of Fransat,

launched a new satellite television solution that can be incorporated into the company’s ES

series televisions using Neotion SA's decryption modules and Fransat's access card. In

February 2012, the company announced that it was considering the acquisition of Samsung

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Mobile Display, a joint venture (JV) with Samsung SDI Co., Ltd. Samsung Mobile Display is a

near monopolistic supplier of organic light-emitting diode (OLED) displays used in high-end

smartphones and touted as the next-generation display to replace LCD flat screens in

televisions. In January 2012, the company enhanced its advertising collaboration with Rovi

Corporation. Samsung is expected to take advantage of a wide range of new advertising

capabilities. Rovi has been introducing new Request For Information (RFI) capabilities that

support click to call, email, and quick response (QR) codes within advertisements, social

networking options, and TV commerce capabilities. In December 2012, the company signed

an agreement with Sony Corporation to form a new business alliance in liquid crystal panel

business. According to the agreement, the company would acquire the joint venture S-LCD,

a manufacturer of liquid crystal panel. Such business collaborations would open new

growth avenues for the company (Global Data, 2013).

Outlook for Memory Products

The company enjoys market leading position in global memory products with 39.4

percent market share in 2011. Positive outlook for memory products could improve the

company’s market share and growth opportunities. The huge demand for NAND flash

memory stems from the increasing demand for smartphones, iPhones, iPads, PCs, high

performance workstations, servers, switches, routers and Internet infrastructure. The

industrial customers have been demanding flash drives instead of rotating disk drives for

enhancing performance and consistency. Flash memory accounts for approximately 8

percent of the total revenue generated by the semiconductor industry. The flash memory

market generated revenue of $23.80 billion in 2010, which is expected to increase to $30.38

billion in 2012. The demand for NAND flash is expected to grow at a CAGR of 14.80 percent

between 2010 and 2014, driven by demand from end-user segments including mobile

handsets, MP3/PMP players, digital cameras, and USB flash drives. This outlook augurs well

for the company. Samsung also leads the DRAM market with a promising market share of

42.2 percent in 2011. The DRAM market is expected to report an impressive growth in the

next three years, which will help the company improve its profitability. The DRAM market is

expected to recover some of the losses it incurred in 2011. The market could register

recovery in pricing from the second quarter of 2012. The global DRAM market revenue is

expected to reach $30.6 billion in 2012, showing an increase of 3.3 percent over that in

2011. It is expected to surpass $30 billion each year for the next five years and exceed $40

33


billion in 2016. Hence, the development in DRAM market, irrespective of economic

slowdown, could enable the company to increase the production of DRAM products and

generate higher revenue (Global Data, 2013).

Threats

Rise in Counterfeit Products

Samsung’s business depends on the uniqueness and quality of its products. The

pervasiveness of counterfeit merchandise may lower the sales of the company and

adversely affect its profit margins. Moreover, as the customers end up buying counterfeit

products, which bear resemblance to the original products, the low quality of the

counterfeits affects consumer confidence and tarnishes the brand image of the genuine

company. The US Chamber of Commerce estimates a cost of $500-600 billion per year on

the global economy due to counterfeiting and piracy. Counterfeiting accounts for about 5-7

percent of the world trade. In US alone, counterfeit activities result in a yearly sales loss of

about $200-250 billion. With the increase in imitation products, the company’s financial

health and brand position may be severely affected (Global Data, 2013).

Competition

The PC peripherals industry is intensely competitive. It is characterized by short

product life cycles, continual performance enhancements, and rapid adoption of

technological and product advancements by competitors in the retail market, and price

sensitivity in the original equipment manufacturer (OEM) market. The notebook product

line that the company offers faces competition from Dell, Hewlett-Packard, LG Electronics

and Acer. In the audio business, the company faces competition from several small

competitors and larger established consumer electronics companies such as Sony and

Philips. In the digital appliances business, its competitors include LG Electronics, Panasonic,

Sharp Corp., and Sony. The company's competitors in mobile phone market include Nokia,

Motorola, Apple, Sony Ericsson, HTC and others. Many of the competitors across categories

or markets have equal or greater marketing resources and brand recognition as the

company. Continuing convergence of the markets for computing devices and consumer

electronics could further increase the competition (Global Data, 2013).

Foreign Currency Fluctuations

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The robust international operations of the company increased its exposure to

foreign currency fluctuations. The company operates throughout the world and has dealings

in various currencies. It operates in 72 countries and transacts business in more than 60

currencies including Euro, Chinese Renminbi, British Pound Sterling, Japanese Yen,

Taiwanese Dollar, Canadian Dollar, and Mexican Peso. However, the functional currency of

the company’s operations is the South Korean Won. The company makes efforts to mitigate

risks through foreign currency hedging. However, hedging activities may not offset more

than a portion of the adverse financial impact resulting from unfavorable movement in

foreign currency exchange rates. Such fluctuations in currency would negatively impact the

overall financial health of the company (Global Data, 2013).

Marketing Mix

Product

Samsung is one of the world’s leading manufacturers of semiconductors,

information technology products, digital media, and telecommunication infrastructure

systems. They manufacture different innovative products including IT business products,

printers, professional displays, telecommunication devices, set top boxes and solar modules.

They also produce semiconductor, LCD panels, compressors, storage devices, and fiber optic

devices. However, the key products that Samsung produces include televisions, digital

cameras, computers, printers and mobile devices. The company also provides a wide range

of solutions for hospitality, healthcare, finance, education, government and insurance

sectors (Global Data, 2013). Their mobile phone lines include Galaxy S phones, Galaxy Note

phones, and other Cell phone versions. The leading phones in the company are the Galaxy S

5 and the Galaxy Note 3.

Place

Samsung is headquartered in Seoul, Republic of Korea. It has operational locations

in Korea, the United States, Europe, Asia, Africa, and China. With its network of subsidiaries

and affiliates, it operates in more than 72 countries worldwide with 197 offices (Pederson,

Samsung Electronics Co., Ltd, 2010).

Price

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The prices after contracts are; Galaxy S 5 retails for $199.99. Galaxy Note 3 retails

for $299.99. These all depend on the services and features that are provided. This retail

prices depends upon multiple variable and promotional incentives.

Promotion

The company uses all five elements of promotion; Advertising, Public Relations,

Sales Promotions, Direct Marketing and Personal Selling.

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Future Prospects and VisionThe smartphone industry is going to continue to grow and change, and while the

‘smartphone’ as we know it today will probably not be around in five to ten years from now,

the basic concept of it will – one device for all of your electronic needs. Currently, wearable

technology such as smartwatches and smartglasses are in high demand, as is flexible

OLEDS. These technologies will only continue to advance, until one day we’re able to

communicate with 3D holograms.

Consumers value consolidation, ease of use, and security when it comes to their

smartphone devices (Wolpin, 2014). This opens up a world of possibilities for how device

manufacturers could advance current technologies. For example, biometric security

(fingerprint, optical, or voice security) could replace the need for passwords. Once this

becomes a major trend, other technologies such as computers and home security systems

may follow suit. This type of advancement could also help progress the digital heath market.

Current technology allows sensors in shoes or wristbands to communicate with

smartphones by relaying information such as heart rate and distance traveled to the

smartphone. In the future, biosensors may be able to communicate all health vitals to the

smartphone device. Additionally, a major problem with smartphones is their battery life.

While portable chargers are the current solution, smartphone manufacturers are diligently

trying to find a permanent solution, one of which is to have the smartphone generate its

own power; this could be don’t through small solar cells or the actual movement of the

phone (Leather, 2013).

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Action Plan: Strategies and Tactics

Objective 1: Develop a Unique Brand Community

If a company in the smartphone industry can successfully create its own

“ecosystem” of products, that company can combat the threats of rapid technological

changes and the large amount of imitations and substitutions, as well as the decline in the

new user market base. If switching costs are high, it’ll be harder for the competition to enter

the market and gain a user base. To do this, a company would need to develop its own app

store, its own operating system, and have a product line that exclusive to its brand, so they

all work with each other but not with other company’s products.

If a company is looking to enter the smartphone market, this strategy will give it a

competitive advantage if deployed correctly. The company would have to be innovative in

marketing and design in order to convince consumers to substitute their current

smartphone for a new one.

However, this will take some time, probably five to 10 years at minimum, for an

existing company in the market (such as Samsung) because they would have to change their

brand identity and product portfolio slowly, as to not upset their current customers. The

first change a company would need to implement is creating its own app store, which

Samsung has already done. This strategy allows the company to shift its focus towards

creating an exclusive brand, but in a slow and non-disruptive way, that way current

consumers don’t feel overwhelmed. By creating an exclusive app store, as long as its full of

unique but demand-worthy apps, current users may become attached to certain apps which

will keep them from switching. Additionally, if the new apps are truly innovative, current

users will become brand ambassadors and market the product for the company.

Next, a company should develop a brand new operating system for their

smartphones and other consumer electronics products. This step will integrate all of the

company’s products, creating an “ecosystem” exclusive to that brand, driving up switching

costs, while at the same time enticing new users to discover why this new company is better

than all the rest. The final step is to create unique software that will continue to drive

current customers to stay and new customers to switch.

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Objective 2: Develop Biosensors Integrated with Cloud ComputingThe rising trend of personal health and wellness management isn’t expected to slow

down anytime soon, especially because of the increase in life expectancy. As a way of

differentiation, a company could take the current wearable technologies and go one step

further by creating unobtrusive, waterproof biosensors that users would wear so they could

constantly monitor their health vitals. These biosensors would transmit the data to the

users cloud health records, that way they (or anyone else such as family members or health

care providers) could view them at any point, from anywhere, on any device.

This kind of innovation will take some time to develop, around five to seven years,

but Samsung is making great headway through its integrated heart rate sensor and

corresponding S Health application. The next step would be to acquire or partner with

biotech companies that have already started developing biosensors. This will allow each

company to develop its retrospective technologies, so when combined, the final product will

be the best of the best.

Objective 3: Produce a Cheaper SmartphoneThe new user market is expected to decrease because the smartphone industry is

close to saturation. However, there are two distinct segments that haven’t entered the

market yet: (1) those with low income (those who make under $50,000 annually) and less

educated (a high school diploma or less); (2) those who are 65 and older. This creates the

opportunity for companies in the industry, or for companies looking to enter the industry,

to develop two new smartphone products geared toward those two segments. For a

powerhouse like Samsung, this should be relatively easy, as the company already has the

financial backing and innovation to make it a success.

The first thing a company would have to do is research and test the top features

deemed important by each segment. Most likely for the segment pertaining to people 65

and older, the smartphone device would have to be easy to use and easy to see (larger

screen, larger apps, ect.). After the R&D and user testing process, the company would have

to begin to develop two new sub-brands (just like Proctor and Gamble did with its

detergents Tide and Cheer) for these cheaper devices. This process could take anywhere

from five to 10 years depending on the company.

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Conclusion With the ever growing threats in the smartphone industry, companies must learn to predict

and adapt to their consumers and their environments in order to remain a competitive force

in this market. As a team, we have learned that in order for Samsung and the smartphone

industry to grow and succeed together, they must focus on the users of their technology and

cater to their constantly evolving wants and needs. In order to be successful, companies will

need to engage in strategic business planning and be proactive in adapting to the consumer.

One way this can be achieved is by developing a unique brand community.

Competitive companies will engage in research and development to innovate and

create the latest cutting-edge operating systems, application stores, and their own unique

software. But the best competitors won’t stop there. Rather they will exceed consumer

expectations by providing them with and experience that focuses on value and convenience,

and allows consumers to feel safe and secure.

With value in mind, it is apparent that in order to continue to survive in a market

that is saturated with high-end products, companies must now create a way to capitalize on

new profits. They must take their current innovations, and simplify them, to develop

products that have similar features and benefits, at a fraction of the price to consumers.

Research and development along with innovation are clearly necessary to companies that

have the desire to continue being a staple in the smartphone industry.

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Appendix A(Nielsen, 2014)

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Appendix B

Samsung SWOT Analysis

STRENGTHS WEAKNESSES

Geographical Reach

Comprehensive Product Portfolio

Improved Liquidity Position

Legal Proceedings

Decline in Inventory Turnover

Decline in Operational Performance

OPPORTUNITIES THREATS

Demand for Smartphones

Launch of New Products

Strategic Collaboration

Rise in Counterfeit Products

Competition

Foreign Currency Fluctuations

Smartphone Industry OT Analysis

OPPORTUNITIES THREATS

Cloud Computing

Personal Health Management

Less Expensive Smartphones

New Operating Systems

Rapid Technological Change

Decline in New User Rate

Substitutions

Threat of New Entry

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