The State of Business Strategy in the Mobile Phone Market
The Mobile Phone industry today is less of a mess than many analysts make it out to be. As tech-geeks, we get so wrapped up in the latest and greatest, we often forget that there is a strong level of business strategy behind these cool toys we all love. Michael Porter is the founding father of modern business strategy. His innovations have brought us concepts from the Value Chain to the Five Forces Analysis. Currently, he leads the Institute for Strategy & Competitiveness at the Harvard Business School, and when Omar Kadafi, the dictator of Libya decided he needed to revamp his economy to be less dependent on oil, he called up Porter to get his advice.
One of Porter’s key concepts are his generic strategies. I’d like to make the case that three firms: Apple, Research in Motion (RIM), and Nokia are relatively very successful today at what they do.
To start, let’s do a brief overview of Porter’s three generic strategies.
Cost Leadership
This is the “Wal-Mart” strategy. A company must produce high volumes of standardized products to take advantage of economies of scale. The product must be a no-frills, low cost, and easy to manufacture. It is essential to be made available to a very large customer base. Even if the margins are low, the volume makes up for it.
Differentiation
A firm practicing the differentiation strategy gains their competitive advantage by creating products that have a perception of uniqueness. You must build your brand to cause a customers to choose your company over others. If done effectively, it eliminates customer buying power, leading to lower price sensitivity and high margins. Again, the key here is that uniqueness, which once established must be a continual process of innovation, because another firm can very easily imitate you.
Focus (market segmentation)
The key to the focus strategy is to zero in on a particular customer group, geographical market, or product line and gain a competitive advantage though product innovation and brand development. This is similar to Family Dollar, an inexpensive dollar store which targets poor urban American families who can not drive to the suburbs.
These generic strategies are unbelievably important at any level of business. There isn’t one that is necessarily better than the other, you just have to be very good at whichever one you choose. You can be profitable in any of those. The problem arises when you get caught in the middle with no defined strategy. That is how companies like GM fall from the sky.
So let’s start with Apple, who burst onto the scene two and a half years ago with the iPhone. It completely revolutionized the mobile phone industry, and every other company is still running to catch up. Every few months, another “iPhone killer” will pop up, only to fade into oblivion after a month or two: Blackberry Storm, Palm Pre, Samsung’s HD touch phone, and the latest, the Motorola DROID. Apple is the textbook definition of a differentiator: a ton of innovation (understatement), which has developed an incredible brand loyalty that has very low price sensitivity. This gives Apple amazing margins. Simply put, no one can touch Apple in the differentiation market, and they are very good at it. Forget how many units they sell, they’ll take the incredible margins.
RIM on the other hand, started off as a focus strategy: they had great innovation for business-specific users. Over the years, this has evolved into a mess of handsets across multiple carriers with no specifically defined plan. They tried to out-Apple Apple with the Blackberry Storm, which was a spectacular failure. They’re doing okay today, however I would question their long-term goals. It seems as though they are moving toward that proverbial loser’s circle in the “middle,” as they attempt to create devices that reach all markets. They’re not necessarily the low-cost producer, they don’t innovate more than Apple, and they don’t have the same kind of brand loyalty, as we’ve seen the exodus of business users to the iPhone. At my $largecompany, I would put the Blackberry to iPhone ratio at about 70/30, which is outstanding for Apple. RIM needs to figure out what they want, and they can remain profitable, as long as they focus on what they’re good at: business users. There’s no question they “get” that market.
Finally, Nokia. They tend to be the red-headed stepchild of the techno-geek world. They have an awful market share in the US, but are relatively strong in Europe and Asia, especially in developing markets such as Brazil and India. Like RIM they, try to innovate with phones like the N97, but just can’t out-Apple Apple. What they do have over any of their competitors though, is incredible market share. With all phones, they nearly double even the closest competitor. Forget the Engadgets and Gizmodos of the world, Nokia should be slashing costs left and right to become the cost-leader selling the cheapest phones. They should have economies of scale like no other, and yet Apple is the one out there negotiating amazing deals on component costs.
I won’t claim to know how these companies should proceed, but RIM and Nokia seem to be somewhat lost at this point with their overall business strategy. Maybe it’s time to bring in someone like Michael Porter, get some definition in their strategic plan, and leave the techno-criticisms to the journalists and bloggers.
