Research Paper Part I

Smartphone Industry Globalization Assessment

IMAN 601 - Smartphone Industry Globalization Assessment
INDUSTRY STRUCTURE
The smartphone industry is a rapidly growing and highly competitive one where diIIerent
business models and technologies battle Ior global dominance. This section will discuss Apple`s
role in this industry, as well as the industry`s global structure.
Apple and the Smartphone Industry
AIter having established themselves as dominant or early entry players in their home
countries, many have expanded globally to compete in markets where technological innovation
dominates. Apple, Inc. is now one oI those global competitors whose brand is recognized
globally.
Apple, Inc.
Apple started out as a company that had nearly been wiped out oI the PC market by
MicrosoIt Windows. While Apple may be a niche PC player, through innovation and merging
Iorm and Iunction, Apple has inIluenced and become a powerhouse oI the smartphone industry.
Apple`s Iirst smartphone, the iPhone, had its genesis in the Newton message pad. Steve Jobs did
not think the Iuture Ior PDAs was good, but he thought that the mobile phone has an excellent
Ieature and the Iirst iPhone, in , was the eIIective merger oI the two.
Apple is the stylistic and innovation leader in smartphones. Apple was listed as world`s
most innovative company Ior both FastCompany ( and Bloomberg BusinessWeek (
magazines. Apple is considered to have taken consumer electronics Irom primarily being
Iunctional to merging Iorm and Iunction together in a manner that has created a loyal Iollowing
among its customers. The smartphone market is growing Iour times the rate oI the overall
mobile phone market, as it continues to erode the presence and strength oI land line
telecommunications companies. The top manuIacturers oI smartphones account Ior two-
IMAN 601 - Smartphone Industry Globalization Assessment
thirds oI all units sold. Despite that concentration oI market share, there are many other
manuIacturers who are emerging, especially in China, and soon, India. Plus, the top companies
continue to seek unit sales growth, even in the Iace oI stiII competition. The top manuIacturers
are primarily located in Asia and North America with the notable exception oI Nokia, which is
based in Finland.
Apple primarily designs its iPhones in the United States, but components are
manuIactured in the U.S. and Asia, while assembly occurs in Asia. Some oI its competitors,
such as Nokia, are much more vertically integrated. Apple`s business model revolves around
premium pricing and, as a result, one oI its strategies has been to open Apple branded retail
outlets to proIit not only Irom wholesale pricing but Irom retail channel markups.
Most oI its competitors compete on price. Overall, the industry is moderately proIitable,
although Apple accounts Ior halI oI industry proIit. Google has staked its Iuture proIitability not
on the smartphones themselves, but on the operating system. So it has introduced an open source
operating system in the hopes oI controlling the application marketplace, analogous with
MicrosoIt`s strategy Ior PCs. Apple keeps tight proprietary control over access to iOS, but it still
has managed to reach billion app downloads since the introduction oI the iPhone.
The industry does not have excess capacity at this point in time due to tremendous
growth that Iurther Iuels economies oI scale in production. Smartphones are almost everywhere,
although they do require a wireless network that can handle a large amount oI data.
Most importantly, smartphone competition is increasing due to the convergence oI
Iunctionality in the phones, along with wireless service providers (especially in the U.S. allow
any phone on their network that uses their communication protocols. ThereIore, the cost oI
switching phones is relatively low. Largely, as smartphones have gotten better technologically,
IMAN 601 - Smartphone Industry Globalization Assessment
the price in real terms is about the same or lower than earlier generations oI mobile phones and
their technological convergence with computing and internet access make them an attractive
device in parts oI the world where the PC penetration is relatively low.
Industrv Characteristics
Until recently, the mobile phone industry was simply viewed as a monolithic industry
with a Iew subcategories. Now, the mobile phone industry is split into traditional cell phones
and smartphones. The smartphone is an evolution oI technology that represents the law oI
increasing degree oI ideality (Fey and Rivin, in technological innovation, where the
product involves an increase in Iunctionality, while the costs oI production decreases. The
industry began to globalize driven by the declining price oI service and equipment, as well as
improvements in global supply chain systems.
Global Structure of Smartphone Industrv
Smartphone manuIacturers are competing across the globe with numerous models to
choose Irom at diIIerent price and quality points. The key characteristics oI smartphones, which
will help in understanding why the degree oI globalization has occurred in the industry,
according to the TechPluto web site (, are a mobile operating system; web-capable;
enhanced hardware, such as digital cameras, or touch screens; mobile processor; technology
support Ior new telecommunication standards. There are many inIluences on the global
competitive structure oI the smartphone industry with the primary Iactors being markets,
competition, production and procurement.
Markets
The big markets in size Ior smartphones are the United States, Western Europe and Asia.
The United States and Europe are substantial markets because smartphone growth is still
IMAN 601 - Smartphone Industry Globalization Assessment
signiIicant and, economically, they are able to aIIord the premium prices Ior smartphones over
standard phones. The big markets Ior growth in smartphone sales are China, Russia and India.
According to telecommunications equipment equity analyst, Mike Ambrasky (, those
countries experienced smartphone sales growth rates oI , and , respectively.
China, the U.S. and Western Europe will continue to be the largest markets with
competitive emphasis being placed on China due to its market size and growth prospects, and the
U.S. because oI its market size and aIIinity Ior smart phones. Emerging markets may be
important Ior economies oI scale, but China and the U.S. will be important Ior proIitability.
ompetition
Smartphone competition is measured based the mobile operating system used and unit
sales by manuIacturers. According to Canalys (, the top Iour operating systems,
comprising oI " shipments, are Android (Google, Symbian (Nokia, iOS (Apple,
and BlackBerry (Research in Motion. With the exception oI Symbian and BlackBerry, most oI
the intellectual property associated with mobile phone operating systems are U.S.-based. The
top sellers oI smartphones, according to Gartner, Inc. (, are presented in the table on the
Iollowing page (in thousands oI units.
IMAN 601 - Smartphone Industry Globalization Assessment
Company Country " Units
Nokia Finland ,.
Samsung South Korea ,.8
LG South Korea ,8.
Apple United States ,8.
Research In Motion Canada ,8.
Sony Ericsson Japan/Sweden ,.
Motorola United States 8,.
HTC Taiwan ,.
ZTE China ,.
Huawei Technologies China ,8.
Others - ,.
Total 417.085.70

Lower price smartphones, which the Android OS dominates, are primarily competed on
by price in Europe, Middle East and AIrica. Most oI the leading manuIacturers are conglomerate
organizations that sell products other than cell phones. Regardless oI the units sold or operating
system used, Apple accounted Ior oI the industry`s proIit on approximately market
share in " (Wagner, .
!roduction
ManuIacturing occurs on a global basis. Nokia has nine production Iacilities three each
in Asia, Europe and North America. Global procurement is nearly the de Iacto standard Ior
smartphones. As the largest market, there are no assembly plants in the United States.
While components may be obtained Irom companies all over the developed world,
assembly usually occurs in Asia, North America or Europe. Most oI the leading manuIacturers
have oIIice or Iacilities in China due to their desire to serve that market, but none, other than the
China-based companies have a signiIicant portion oI their capacity in China, although that may
change depending on market opportunities and government policies.
IMAN 601 - Smartphone Industry Globalization Assessment
!rocurement
The Iirst Apple iPhone will be used as an example oI global procurement Ior
smartphones, which incorporate dozens oI technologies that no one nation has a monopoly on
(www.texyt.com, . The table below lists the component, where it is sourced Irom and how
strategic it is to the product.
Component Supplier & Location Strategic Importance
Flash chip memory Intel U.S. High holds iPhone soItware
Video processor IC Samsung Korea High
Display Sharp & Sanyo Epson Japan High
Touch sensitive modules in LCD Balda AG Germany High multi-touch control Ieature
Scratch resistant glass screen Balda AG Germany Moderate iPod Nano complaint
Bluetooth module Cambridge Silicon Radio U.K. Moderate
WiFi chip Marvell U.S. Moderate
InterIace chip Ior multi-touch Broadcom U.S. High
Stainless steel iPhone case Catcher Technology Taiwan Low
Circuit boards Unimicron Technology Corp. High brings components together
Design and intellectual property oI these components reside in the global headquarters oI
many oI these companies, but most oI the components are actually manuIactured in some part oI
Asia, where Taiwan is the global leader in chip production.
How the Kev Factors Shape the Structure of the Industrv
The Iactors above that help describe the degree oI globalization in the smartphone
industry will also shape how the industry changes in the Iuture. The U.S., Asia and Europe will
continue to be targeted Ior all price and quality points Ior smartphones and the low cost
smartphone providers will continue to make inroads on the growth in Eastern Europe, the Middle
East and AIrica. Technology innovations, style and design Ieatures are occurring primarily in
North America and Japan, so the latest and greatest products are usually released there.
The competition is still largely Irom the same regions with the addition oI the Chinese
manuIacturers and, given the potential size oI that market, it is expected that more indigenous
companies will emerge Ior a share oI that growing pie. There is a growing amount oI
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competition at the level oI component suppliers, which, depending on the outcome will diversiIy
the location oI component production, but will otherwise keep the manuIacturers in strong
position. However, many oI the challengers come Irom the same countries as existing vendors,
so they will be able to quickly plug into the logistical supply chain. There may be Iurther
production diversiIication iI other lower wage countries attain greater political stability. Given
the long lead times Ior new manuIacturing plant, stability is a key consideration in locating
Iacilities.
hallenges to Globalization
Some oI the challenges Ior the industry include countries without modern
telecommunications inIrastructure, concentration oI needed technologies in a handIul oI
countries, maximizing Iirst user usability and experience, attempts at platIorm control, and lack
oI a global technology standard.
Target Market Infrastructure
Both the inIrastructure Ior component suppliers and end users Ior smartphones are
unevenly developed around the globe. Some nations` telecommunications systems are not
compatible with G and G smartphones. The industry is working on even more advanced
phone and attempts to improve data delivery speed will spur Iurther innovation. These nations
may never have catch up without outside help.
oncentration of Needed Technologies
The inIrastructure Ior components suppliers are also unevenly developed around the
globe. This limits the potential number oI potential suppliers because it will be diIIicult Ior one
to develop a tenable cost advantage over another iI they operate in the same country in the same
labor pool.
IMAN 601 - Smartphone Industry Globalization Assessment
Maximizing First User Usabilitv and Experience
Although the population oI savvy smartphone users is signiIicant, improving the
experience oI Iirst users, either elderly or underdeveloped is important. While the manuIacturer
has no control over the quality oI service by the service vendor, it does have control over how
easy their products are to use. That is one oI the hopes Ior the Android OS. Even low end
smartphones are pricey compared to traditional mobile phones.
!latform ontrol
One oI the reasons that the U.S. mobile phone market was not a place oI innovation is
that the service providers would dictate to the manuIacturers what they would and wouldn`t
allow on their networks. Apple`s agreement with AT&T on exclusivity was meant to give Apple
Ireedom with design and technology. Elsewhere, users can use any phone on any network. At
the phone level, Apple is attempting to control its platIorm as its business model. That requires
developers making bets on the Iuture oI iOS and Apple`s support oI it.
Lack of a Global Technologv Standard
For a period oI time, GSM was the dominant G standard around the world, except Ior
the U.S. Japan then leapt ahead oI the world with G and G technology standards. Now,
mobile phone service providers are now running networks that are a combination oI
nd
,
rd
and

th
generation mobile phone communication standards. This will limit consumer choice and
retard growth in the industry.
Global Logic
The logic that drives Apple and its competitors to the global scale is that smartphone
technology is able to quickly cross cultural and language boundaries because it can meet many
diIIerent needs with the same Iunctionality. Like automobiles, smartphones only need the
IMAN 601 - Smartphone Industry Globalization Assessment
supporting inIrastructure oI wireless networks, whose equipment can be purchased Irom almost
any part oI the world, especially between Asia, North America and Europe. Entering the
smartphone industry is a capital intensive venture that quickly directs its companies in the
direction oI establishing global scale.
Some industries have to establish a local presence to do successIully grow and do
business in a Ioreign nation. The smartphone industry is able to circumvent that type oI political
or nationalistic pressure because most oI the manuIacturers are not vertically integrated enough
to make a diIIerence. In each country, there is a local wireless service provider that smartphone
users acquire their service through, as well as a local retail vendor who they buy their phones
Irom. ThereIore, the smartphone industry was able to rapidly globalize because the 'pie oI the
value chain was Iragmented, leaving something Ior everyone. That made the introduction oI
wildly successIul smartphones, wildly successIul Ior every company in the value chain, Irom the
suppliers to the local retailers to the service providers. It is similar to the rapid globalization oI
consumer electronics, where many oI the devices were created in the U.S., but globally minded
Japanese companies took those inventions, got them into the mass consumer market and rapidly
scaled up production and implemented supply chain management to lower costs.
Competitive Structure of the Smartphone Industry
The smartphone industry is very competitive due to the convergence oI technologies
embedded in smartphones namely, internet computing, digital camera, wiIi, Bluetooth and
multi-media capabilities. Smartphones have the capacity to displace some versions oI the single
Iunction product as technological advances dictate.
With the Iorecasts Ior global growth oI smartphones, the competitive structure oI the
industry is changing rapidly. New companies are entering the market every year, rivalry is
IMAN 601 - Smartphone Industry Globalization Assessment
intense Ior both the handsets and the operating systems. Buyers are presented with a much
broader range oI smartphones than in the past, driving average wholesale prices down, even Ior
Apple. Due to the growth and market size Ior smartphones, competition is intensiIying Ior
suppliers to the manuIacturers, Iurther lowering the cost oI the value chain. Finally, no actual
substitute products have emerged yet, but some analysts are proiecting that tablets may eat into
smartphone sales in the Iuture, as some companies experiment with merging the smartphone with
tablet computing Ior consumers who can not aIIord to buy both. The Iigure below summarizes
the competitive structure oI the smartphone industry.

arriers to Entrv
Barriers to entry are strong, both Ior smartphones and their operating systems. While the
Iocus oI this paper is on the hardware, the soItware is as much as part oI the changing
competitive structure oI the industry. The barriers Iaced by hardware manuIacturers are due to
the R&D and capital investment required. The barriers Iaced by operating system developers are
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IMAN 601 - Smartphone Industry Globalization Assessment
due to the diIIiculty oI getting manuIacturers to use their operating systems applications because
oI Iirst mover advantages in getting applications developed Ior their platIorm by third party
developers. Wireless service providers select which phones they will allow to use their network.
And switching costs Ior customers to use smartphones that are not available on their networks is
high.
The barrier to entry that is mostly beyond the control oI the industry is the switching
costs associated with moving to a new service provider to take advantage oI the Iunctionality oI a
new smartphone product. Many wireless service providers require their customers to sign two-
year service agreements in return Ior discounts on the smartphones Ior their network. Also,
customers are not as likely to leave a wireless service provider that works well Ior them. Call
reliability and availability still trump Iunctionality. This barrier is one oI the reasons that Apple
expanded the use oI the iPhone Irom the AT&T network to include Verizon, the largest wireless
provider in the United States. The beneIit oI being able to circumvent that barrier caused some
Apple critics to quiet their criticisms to a degree. Many argued that all potential iPhone users
had migrated to AT&T and that there would be poor demand Ior the iPhone on Verizon`s
network. However, on the Iirst day that Verizon customers were able to pre-order the iPhone,
February , , Verizon had to halt sales because its entire beginning allotment oI ,
phones had been ordered in less than a day (Ogg, .
Smartphone Hardware
While the cost oI entering the smartphone industry is signiIicant given the plant and
technology costs, the investment capital is there, which keeps the barriers to entry relatively low
because there is money to be made. The emerging dominance oI smartphones is comparable to
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the dot com boom. Startups Ior smartphones themselves, as well as the component technologies,
continue to be Iunded by venture.
A recent attempt to Iragment the smartphone market has been taken by Hutchison
Whampoa Ltd. (HWL, which released the IN" phone targeted at mobile phone users between
8 and (Kapica, . It was touted as being a low-cost social networking smartphone with
built in applications that automatically log the phones` users into Facebook, instant messaging,
twitter and email. The idea is to target users Ior whom traditional smartphones are perceived to
be too expensive, especially the data plans. At the time, the CEO oI HWL cited a statistic that
'8 precent oI Canadians under the age oI do not own a smartphone because the cost is
prohibitive. The phone uses a less robust operating system that requires much less processing
power than typical smartphones, which translates into cheaper chip component costs.
Smartphone Software
The parallel threat oI entry Ior the smartphone industry revolves around the operating
system (OS. The capital investment Ior OS development is less than the capital requirements
Ior hardware, but it is much more diIIicult Ior new entrants to make their mark. The largest
barrier to entry Ior new operating systems is the need to persuade a manuIacturer to adopt a
particular OS. The barrier is so diIIicult to overcome because oI the applications development
aspect oI the industry.
Switching osts
Similar to PC operating systems and gaming consoles, it is very diIIicult to introduce a
new OS due to the reliance on third party developers to create applications Ior that OS.
Additionally, mobile manuIacturers and the wireless service providers oIten market the variety
oI applications that are available Ior the users oI the smartphones on their networks. Finally,
IMAN 601 - Smartphone Industry Globalization Assessment
smartphone OS use is concentrated, where the top Iour smartphone operating systems account
Ior oI all units sold. While still strong, switching costs are not nearly as strong as the lack
oI portability oI mobile phone numbers beIore changes in that practice by the wireless providers,
which kept many customers attached to their providers.
argaining !ower of uvers
The bargaining power oI buyers is strong. This is due to the increasing importance oI
scale Ior most manuIacturers Ior pricing, broad range oI products available, and the emergence
oI lower cost wireless providers who have reduced switching costs by not requiring service
contracts.
Economies of Scale
Due to the economies oI scale oI production, smartphone manuIacturers need to sell a lot
oI phones to be cost competitive in production and pricing. Even Apple signiIicantly lowered
the price oI the iPhone Irom the Iirst generation to the next. There are only so many people who
will spend $ or more on a smartphone. Because the industry is shipping hundreds oI millions
oI units per year, this helps keep prices down Ior consumers, limiting the proIitability oI most
manuIacturers. A long-term threat Ior the industry is in the eventual commoditization oI
smartphone hardware, which would strengthen buyers even Iurther. However, that is not
Iorecasted in the near term yet.
!roduct Jarietv
In addition to pure pricing issues, the number oI smartphone models is increasing rapidly
as most manuIacturers broaden their product diversity to hit diIIerent price points and diIIerent
demographics. Some manuIacturers, like Research in Motion, have primarily targeted business
users oI smartphones with their iconic trackball approach to scrolling through email and text
IMAN 601 - Smartphone Industry Globalization Assessment
messages. However, as technology convergence continues in successive smartphone
generations, the line between casual user and business user is blurred, prompting it to release
more BlackBerry models. Only Apple is employing a single model strategy at this point.
Low ost Wireless !roviders Reducing Switching osts
In mobile phone service, a niche had been carved out to provide service to less than credit
worthy customers by having them pay Ior their minutes up Iront. This system worked well until
the advent oI the smartphone and the technologies that support it. Now, to take market share
Irom the larger wireless service providers, some wireless service providers are reducing or
eliminating the service contract period, which reduces the switching costs to customers and
strengthens their position with the ability to switch wireless service providers more easily. New
wireless service providers, such as StraightTalk (-day service contract, BoostMobile (no plan
and Kricket (no plan all attack the service contract as their business strategy that also happens to
lower the switching cost barrier slightly. However, such approaches may become a part oI
customer expectations in the long-term that strengthens their ability to switch smartphones in a
relatively quick period oI time.
argaining !ower of Suppliers
The bargaining power oI suppliers is weak, with growing smartphone sales attracting
more competitors in the component industries. There are many components in a smartphone, but
the ones with increasing competition are (Ior Iunction and cost are the screen/display,
applications processor, and ancillary wireless (Hiller, . These components are sources oI
innovation and, increasingly, competition among the suppliers to the manuIacturers oI
smartphones.
IMAN 601 - Smartphone Industry Globalization Assessment
Screen/Displav
The competition to improve the screen/display, which consists oI a scratch resistant glass,
a capacitive or resistive touch control layer, and the underlying display itselI. Each one oI these
components is undergoing swiIt innovation and adaptation. The touch control layer matters
because capacitive touch screens cannot be used with gloves or styluses, while resistive touch
screens can. The biggest battle is occurring in the display itselI (Grewal, . The two
dominant display technologies are liquid crystal displays (LCD and active matrix organic light
emitting diode (AMOLED. The LCD is the more common, but both have shortcomings that are
spurring continued innovation. The Iirst new display technology is the in-plane switching (IPS
screen used in the iPhone (manuIactured by two Japanese companies that overcomes the
shortcomings oI LCD and AMOLED displays, but costs signiIicantly more.
Given that Apple only accounts Ior oI global smartphone sales, that leaves plenty oI
room Ior more suppliers. Two new competing technologies are being developed to take
advantage oI this opportunity Super AMOLED and Super LCD (Grewal, . There are
three characteristics on which this technology battle is being Iought and that is price, viewability
in sunlight and power consumption.
Applications !rocessor
Currently, the applications processor in smartphones is dominated by the ARM
architecture contained in oI all sold smartphones and used in most consumer electronics.
As smartphones have gotten technologically more sophisticated and greater processing capacity
is needed Ior the embedded and third party applications, other manuIacturers oI processors have
set their sights on the smartphone industry.
IMAN 601 - Smartphone Industry Globalization Assessment
Other global manuIacturers oI application processors were not seen as competitive
because oI energy consumption by their chips. As general innovation and technological
improvements have been made, along with miniaturization in laptops, some oI these companies
see tablets and smartphones as the next growth market. In the Mobile World Congress,
Intel and MIPS Technologies (both U.S.-based makers oI processors announced that they would
be introducing chips Ior tablet PCs (Intel only and smartphones (Miller, . As with all
smartphone technology, they are Iocused on the highest perIormance at the minimum level oI
energy usage because phone battery liIe is still a key Iactor in the consumer smartphone
purchasing decision. Intel and MIPS Technologies are vertically integrated processor
designer/manuIacturers, while ARM Holdings, the owner oI the ARM architecture, licenses its
design to other companies Ior manuIacturing.
Ancillarv Wireless
Ancillary wireless chips contain the Iunctionality Ior GPS, Bluetooth and Wi-Fi. This
component is critical to connecting to other networks and devices. Additionally, as these chips
improve, through the Wi-Fi capability, it can help keep data costs down, which may become a
more important Ieature in the long-term as internet bandwidth approaches capacity and the
service providers attempt to promote tiered data usage rates.
Threat of Substitutes
The threat oI substitutes is weak. While possibly being a substitute Ior PCs, tablets are
not substitutes Ior smartphones. In Iact, they are a move in the opposite direction and reason Ior
the popularity oI mobile phones size. Also, the tablets cost more than smartphones without the
communication capacity unless an additional service, such as Skype is used and, newer
smartphones are being made that include Skype, negating the need Ior a PC. Land lines are no
IMAN 601 - Smartphone Industry Globalization Assessment 8
substitute Ior smartphones because land line usage has been declining ever since the mass
marketing oI mobile phones and many households no longer have land lines, but rely upon
mobile phones and the internet Ior communicating.
Intensitv of Rivalrv
The intensity oI rivalry is strong. The smartphone industry rivalry is so intense due to the
relatively large number oI competitors, market growth attracting new investors, and outsourcing
oI key components. Improvements in technology and manuIacturing also make it easier Ior
companies with a lot capital to put out a marginally competitive smartphone.
Large Number of ompetitors
Although the top manuIacturers account Ior two-thirds oI global sales, the remaining
one third oI sales constitutes million smartphones sold by other companies. Apple
represents only a market share oI smartphones. However, the introduction oI the Apple
iPhone and competing devices have driven Nokia`s market share Irom in to iust
in three years (Faris, . The competition on the OS side has seen Google`s Android OS
become the number one smartphone OS in iust two-and-a-halI years and seen that part oI the
battle become more intense as Nokia abandoned its Symbian OS and goes to a Windows OS Ior
smartphones.
Market Growth Attracting New Investors
Not only is market growth attracting new investors, but the prospect oI another proIitable
Iirm like Apple brings investors to hear pitches Ior new companies. Until smartphone
manuIacturing is commoditized, its high growth and higher product margins will make the
industry attractive to companies Irom the component level to the design level.
IMAN 601 - Smartphone Industry Globalization Assessment
utsourcing of omponents
As the battle Ior smartphone supremacy is waged in hardware and soItware applications,
many oI the key components are oIten outsourced. For Nokia, the world`s number one seller oI
mobile phones, its strength as manuIacturer managing its global supply chain is no longer an
advantage. Smartphone users desire Ior Iunctionality, ease oI use (Android OS and iOS rank
high on that list, and applications dominate consumers decision process, who makes what is less
important than the sum oI the whole.
For example, the emergence oI the Chinese smartphone companies ZTC and Huawei
Technologies are based not only to regional proximity, but also to the Iact that many smartphone
components are manuIactured in China or that geographic region. Rivalry is also increasing
because most smartphone manuIacturers are only involved in a Iew areas oI the value chain Irom
the wireless service provider to the user oI the smartphone, as shown in the graphic below.

IMAN 601 - Smartphone Industry Globalization Assessment
How the Five Forces Shape the Industrv
The smartphone industry is a period oI intense competition and change. The landscape oI
the industry has been remade twice in a relatively short period oI time, Iirst by the release oI the
iPhone, which tackled many oI the complaints that users had about smartphones (and Apple
media players, second by the ascendance oI Android OS as the dominant platIorm Ior
smartphones and the lucrative apps market associated with it.
The ways Porter`s Iive Iorces interact are key to how the industry has changed. The
weakness oI suppliers is a crucial part because strength on the part oI suppliers can actually slow
innovation and makes the cost oI doing business much higher. That would make the industry
less proIitable and, thereIore less attractive to be in. The weakness oI suppliers spurs innovation
on their part to take advantage oI the industry`s growth prospects. The weakness oI the threat oI
substitutes is also an important Iactor. Without the threat oI a viable substitute, investors simply
Iocus their attention on opportunities in the industry rather than Iocusing outside oI the industry
Ior its replacement technology. The smartphone is nearly the ideal miniaturization oI many
electronic devices rolled up in one. That is a very diIIicult technological Ieat to achieve.
The weak Iorces that act on the industry act as complements to the strong Iorces. While
the competition is Iierce, the barriers to entry into the industry are strong and the growing
economies oI scale make it that much more diIIicult Ior low capitalization Iirms to enter the
industry, even iI the weak supplier Iorce makes it easier to source the components. The required
R&D Ior new designs is in the billions. Nokia spent $ billion on R&D in alone. The
power oI buyers is spurring Iurther innovation in smartphones, seeking to address many
consumer needs and wants in a single device that is easy to use and reliable. The market growth
is a testament to the consumer demand Ior smartphones and when they really do the iob well,
IMAN 601 - Smartphone Industry Globalization Assessment
such as the iPhone, then consumers are even willing to pay a premium. Finally, the intensity oI
rivalry is another Iorce Ior innovation where Iortunes can change dramatically in years (see
Motorola or Nokia and the pace oI innovation in diIIerent aspects oI the smartphone industry
make it hard to predict the Iuture, but makes it exciting and proIitable all the while.
Strategic Group Map
In the current dynamics oI the smartphone industry, Apple`s Iinancial and brand image
success with the iPhone make it the 8 pound gorilla in the industry. Mobility barriers Ior its
strategic group oI proprietary OS platIorms allow it to achieve superior proIitability and make it
diIIicult Ior common OS platIorm Iirms to switch strategies to its approach. However, the long-
term threat to Apple is the attempt by Google to erode its proIitability and image, not by
competing within its strategic group, but by strengthening the common OS platIorm strategic
group. Google hopes to topple Apple by becoming the king maker oI the smartphone OS and
reaping superior proIits Ior itselI with a transactional business model based on the Android
smartphone applications marketplace.
Maior Groups and Differentiating Strategies
Traditional views on strategic grouping may evaluate the smartphone industry Irom a
traditional perspective, such as degree oI vertical integration or geographic reach. The
technology oI smartphones overcomes many cultural barriers to some consumer products. The
smartphone has changed rapidly in the last decade and can be broken into two strategic groups
common operating system platIorm and proprietary operating system platIorm users. The two
graphics on the Iollowing page show how the two strategic groups are oriented by revenue and
product diversity (number oI models with the bubble size indicating relative proIitability in U.S.
IMAN 601 - Smartphone Industry Globalization Assessment
dollars (Nokia is included in both because it recently announced that it was going to a Window
Phone OS.


ommon perating Svstem !latform
Most smartphone manuIacturers select one or more common OS platIorms to be used in
its diIIerent models. They then tailor their hardware around the capabilities and user interIace oI
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IMAN 601 - Smartphone Industry Globalization Assessment
the soItware. The common OS platIorms are Android, Windows, and Linux. The members oI
this strategic group compete against one another on Ieatures, styling and price. Cost
competitiveness is an important Iactor Ior success in this strategic group. Until the recent
strategy mobilization oI Nokia,
!roprietarv perating Svstem !latform
Other manuIacturers, such as Apple, Nokia, Research in Motion and Palm rely upon
custom proprietary OS platIorms that they control. In their strategic group, they attempt to put
out a better smartphone by being able to develop the OS based on the Ieatures and Iunctionality
that they believe the product needs and do not want to be limited by constraints that a third party
OS platIorm may entail, such as Android. In a sense, these Iirms are taking responsibility Ior a
portion oI the value chain that most other companies circumvent. Overall, this strategic group is
more proIitable than the common OS platIorm group, but that is primarily due to Apple`s
Iinancial perIormance.
Mobilitv arriers
The mobility barriers that separate Apple`s strategic group Irom the other group are
proprietary operating system development and branding and marketing. The companies in that
strategic group know how to marry hardware, soItware and a distinct style or aesthetic into their
smartphones.
!roprietarv perating Svstem Development
The key diIIerentiator Ior this strategic group is the development oI its own proprietary
operating system. It is a daunting task Ior another competitor that doesn`t already have it as part
oI its business model. Research and development (R&D expenses are signiIicant. For example,
in , Nokia announced a partnership with MicrosoIt to help Nokia stop the loss oI market
IMAN 601 - Smartphone Industry Globalization Assessment
share in smartphones and to help MicrosoIt gain market share in the smartphone OS arena, where
Windows Phone will now become the de Iacto OS Ior all new Nokia smartphones. In ,
Nokia had spent $ billion on OS R&D, while Apple had only spent halI that amount. Throwing
money at a problem doesn`t guarantee that a company will end up with robust, well-Iunctioning
smartphone OS.
randing and Marketing
Most oI the companies in this strategic group have well deIined brands that each have
their own distinctive characteristic that their loyal customers instantly know marks it as their
product. For Apple, it was the multi-touch screen with no mini-"WERTY buttons, as well as a
look and Ieel that its iPod customers would have already been Iamiliar with. BlackBerry had
earned the nickname 'crackberry Irom some oI its business users because they Iound the use oI
its trackball combined with the ease oI its user interIace addictive. The trackball makes it easy
Ior users to scroll through their email with one hand. Each company had a distinctive identity Ior
its smartphone products and had developed a branding and marketing strategy to complement the
strength and uniqueness oI its products.
Implications for Apple
Apple is seen as the undisputed champion oI the smartphone industry that helped turn it
upside down and laid a path oI innovation that has quickly been adopted by competitors.
Apple`s business model has proven to be exceptionally proIitable at this point, based on a Iirst
mover advantage in smartphones. Its greatest challenge does not come Irom its strategic group,
but Irom the common OS platIorm strategic group that is attempting to use economies oI scale,
decreasing cost oI key components, and a larger installed base OS to attract consumers away
with a large app presence to reduce Apple`s market share and proIitability. Apple is still number
IMAN 601 - Smartphone Industry Globalization Assessment
one, but its competitors are constantly adapting to position themselves to knock it over, as Apple
did to Nokia a short three years ago.
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IMAN 601 - Smartphone Industry Globalization Assessment
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