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1 Accessed on Feb.23rd, 2007, The List of Fortune Global 500 in 2005 http://brand.icxo.com/brand500/top500_1.htm During the progress of Chinese handset industry. To confirm whether the competitive strategies are acurate, I use Porters 5 forces theory as the frame to anatomize the factors such as Economies of scale, Product differentiation, Capital requirements, Cost disadvantages, independent of size, Access to distribution channels, Government policies, and Competitors Retaliation. Thereby, the rationalities of Nokias competitive strategies in Chinese handset industry may be authenticated. According to the great lots of evidence collected from website newspapers and catena, new trends of handset industry appear gradually. To grasp the future flux on market share and industrial environment, it is necessary for Nokia to nip in the bud. As a natural extending of the aforesaid analysis on competitive strategies, this paper also expounds the reason causing the new industrial trend in Chinese handset industry and suggests the probable strategies Nokia may adopt. As is well known, according to the Moores law, the chips of the handset is developing at a very rapid speed. Moreover, the handset is still influenced by the fluky vanguard fashion. It is not easy to survive in the fluctuate market, and say nothing of being leading company in the industry. I wish textual analysis might benefit the readers to recognize the industrial situation and use Nokia for reference. This text takes a logical sequence to discuss the total analysis, so the chapters are in turn as follows: Introduction to ReportIntroduction on Nokia Corporate The Mobile Handset IndustryIndustrial Analysis Using Porters 5 Forces Theories Analysis on Nokias Competitive StrategiesEvolution of Nokias Competitive Strategies and Conclusion. The content of each chapter encircles its name, and the detailed discussion will be deployed in the following chapter.
the world. The whole experience is full of legendary color, as is introduced as follows:
At present, Nokia comprises four main business groups: mobile handsets, multimedia, enterprise solutions, and networks. Among them, the mobile handset is the pillar business for entire group operation. According to annual report of 2005, Nokias net sales arrived at EUR 34 191 million3, realizing an increase rate of 12.56% when compared with EUR 30376 million in 20004. Among the total net sales, sales of mobile phones reached EUR 20811 million, occupying 60.87% of the total net sales. In 1992, the mobile handset business only account for 20% of the total sales of entire group. Nokias operating profit for 2005 reached EUR 4 639 million, representing a 2005 operating margin of 13.6%, and Operating profit in mobile handsets decreased 5% to EUR 3 598 million (operating profit of EUR 3 786 million in 20045), representing a 2005 operating margin of 2 Accessed on Feb.23rd, 2007, The History of Nokia 1865-2002, http://r2.nokia.com/nokiahistory/index.html 3 Accessed on Feb. 23rd, 2007, Key data of Nokia http://www.nokia.com/link?cid=EDITORIAL_4026 4 Accessed on Feb. 23rd, 2007, Annual Information 2000, http://www.nokia.com/A4126501 5 Accessed on Feb. 23rd, 2007, Annual Information 2004, http://www.nokia.com/A4126497 17.3%. However, in comparison with the EUR 83 million in 19926, the operating profit of mobile handset in 2005 represents more than 43 times increase. As is recognized by the global consumers, Nokia brand was ranked 16th among The World 500 Most Influential Brands in 2005 by the World Brand Lab. According to the Fortune Global 500 in 2005, Nokia group ranked 130th and represented no. 1 among the Industry of Network and Other Communications Equipment, taking a position higher than any other competitors. From the aspect of mobile handset, till Sept. 2006, Nokia captures 35.1% of the global market. According to the Gartner institute, Motorola was in second
place, with market share of 20.6%, and Samsung of South Korea saw its share of the world market fall to 12.2 % from 12.5 in third quarter 2005. 7 Obviously, Nokia has firmly established its leading position in its industry and has become the world's leading provider of mobile telephones.
25.8% of domestic handset market share in 2005, realizing 10.8% more than in 2004. By contrast, the second brand Motorola only gets 8.7% of market share11. After decades of tillage, Nokia has really established its leading position in the handset industry in China; it is believed that Nokia will actualize greater success in the mobile 8 Martti Haikio (2003) NOKIA THE INSIDE STORY: Beijing Strategies of Nokia, Published by Edita Publishing Ltd and Nokia Oyj, Copyright 2002, Chinese Edition First Printed in Sept. 2003. pp.234-236. 9 Accessed on Feb.23rd, 2007, Explore Star Net Industry District, by Wangshucheng, Huoxiaoguang, Yujingzhong, Source from Xinhua Agency. Yesky.com-Chinese IT website, http://www.yesky.com/135/215635.shtml 10 Accessed on Feb.23rd, 2007, Synthesized analysis report on handset in China by YiGuan, Jun. 29th, 2004, http://www.c114.net/zhuanti_simple/3g/Read_3g.asp?action=3gzlk&styptID=3 &articleID=26 11 Accessed on Feb.23rd, 2007, Domestic Handset Market Share Declines March, 28th, 2006, http://www.chinamobile.gov.cn/200603/61242.shtml communication market in China under the 3G era.
Most current mobile handsets connect to a cellular network of base stations (cell sites), which is in turn interconnected to the public switched telephone network (PSTN) (the exception are satellite phones). Cellular networks were first introduced in the early to mid 1980s (the 1G generation). Prior mobile handsets operating without a cellular network (the so-called 0G generation), such as Mobile Telephone Service, date back to 1945. Until the mid to late 1980s, most mobile handsets were sufficiently large that they were permanently installed in vehicles as car phones. With the advance of miniaturization, currently the vast majority of mobile handsets are handheld. In addition to the standard voice function of a telephone, a mobile handset can support many additional services such as SMS for text messaging, email, packet switching for access to the Internet, and MMS for sending and receiving photos and video.12
global mobile handset market of 35%, 16.3%, 12.1%, 7.2% and 6.9% respectively13. As is calculated, the mobile handset sales continue to grow worldwide, going up from 482.5 million in 2003 to 561 million in 2004. This growth rate is expected to gradually slow down over a period of five years. The estimated growth figures for these five years are10% in 2005, 7.7% in 2006, 6.4% in 2007, 4.8% in 2008 and 2.6% in 2009.14 Clearly, the global handset industry has been growing fast and will continue to grow for next 3 years. However, the rate of industrial growth will calm down, a status leading to prudential optimism. 13 Accessed on Feb.23rd, 2007, Big Six Dominate Expanding Mobile Phone Market, by John Leyden. Feb.28th, 2006, http://www.theregister.co.uk/2006/02/28/gartner_mobile_market_2006/ 14 Accessed on Feb.23rd, 2007, Changing Faces of The Global Mobile Handset Market 2007, Research and Consultancy Outsourcing Services, March 2005, Pages: 95 Researchandmarkets http://www.researchandmarkets.com/reportinfo.asp?report_id=63375
Simultaneously, China has gradually become the export base of mobile handset. According to the statistics of MII, the handset export in 2005 is 228 million units, occupying 75% of total handset production. Compared to the 43.3% of export rate in 2000, the higher rate for export in 2005 indicates the excess capacities of handset production and the advent of market maturation in China.18 It is estimated that in 2006, the output of handset will arrive at 0.34 billion units including 0.25 billion for export purpose19. Generally speaking, the developing trend of handset industry in China will maintain rapidhealthyand harmony progress. 18 Accessed on Feb.23rd, 2007, Comment on the 2005 development of handset industry in China, Website of Ministry of Information Industry of the Peoples Republic of China http://www.mii.gov.cn/art/2006/03/15/art_62_8307.html 19 Accessed on Feb.23rd, 2007, Comment on the 2005 development of handset industry in China, Website of Ministry of Information Industry of the Peoples Republic of China http://www.mii.gov.cn/art/2006/03/15/art_62_8307.html
the zenith of 60% in 2003 to 40.6% in 2005. And the ranked top 3 domestic brands occupy only 17.5% shares in comparison with 31.6% in 200322. According to the 2005 rank on sale of GSM handset in China, the top 10 brand is in turn as follows: NokiaMotorolaSamsungBirdAmoiSonyEricssonLenovoTCLKoncaHaier. Among them, top 3 brands occupy 60.05% of domestic market share, a number overpassing the total result of domestic brands23. 20 Accessed on Feb.23rd, 2007, The competitive situation in handset market in China, http://www.china-qg.com/articleHistory/yingXiao/4/275.html 21 Accessed on Feb.23rd, 2007, Handset Market Increasingly Open, by Zhugangqi, Nov. 29th, 2006, http://www.cww.net.cn/consultation/shownews.asp?nid=207 22 Accessed on Feb.23rd, 2007, Market Shares of Foreign Handset Increasing Rapidly, Mar. 21st, 2006, Source: MII. http://www.ccw.com.cn/news2/mobile/htm2006/20060321_09RRM.htm 23 Accessed on Feb.23rd, 2007, Domestic Rank of Handset Sales, by YiGuan, Source: CNETNews.com.cn, http://www.cnetnews.com.cn/news/review/story/0,3800057985,39445251,00.h tm The following is the overview on the major participants, which probably possess potential capacity to challenge Nokia:
3.3.1 Motorola
Motorola is known around the world for innovation and leadership in wireless and broadband communications. Motorola came to China in 1987 when it opened a representative office in Beijing. In 1992, Motorola (China) Electronics Ltd. was established in Tianjin, a major manufacturing base where Motorola produces mobile phones, two-way radios, wireless communications equipment for the Chinese and global markets. 24 Today, Motorola has one holding company, three wholly owned companies, five joint ventures, 16 R&D centers and 25 branch offices across China. At the end of 2005, the number of employees exceeded 10,000, and the total cumulative investment in China reached US$3.6 billion, making it one of the
largest foreign investors in China. Investment in R&D has reached US$600 million.25 The goal of Motorola's China strategy is to build China into world-class production and R&D bases. While pursuing and maintaining market leadership in both mobile devices and infrastructure equipment, Motorola continues to develop businesses in digital trunking, broadband products, solutions and services. As a runner-up in the mobile industry, Motorola keeps fighting its way for market leading position all the while. Undoubtedly, relying on its high-tech R&D and cogent brand, Motorola can be qualified as the strongest challenger for Nokia in the mobile handset manufacture industry, no matter in China or in global market. 24 Accessed on Feb.23rd, 2007, Motorola China is the biggest wholly foreign invested enterprise Source: Tianjin Developing District Investment Net, Jun. 26th, 2003, http://www.investteda.org/zxzx/tdtzdt/t20051025_6324.htm 25 Accessed on Feb.23rd, 2007, Motorola in China, http://www.motorola.com.cn/about/inchina/inchina_en.asp
3.3.2 Samsung
Since its founding in 1938, SAMSUNG (Group) has maintained a mission statement that responds both to its own change, and to new developments in the world. After unremitting struggle for decades, the company grows from a domestic industrial leader into a global consumer electronics powerhouse. Following its management philosophy-"We will devote our human resources and technology to create superior products and services, thereby contributing to a better global society", Samsung achieves quick pace of development. And Samsungs brand value, a key engine of business growth, increased to US$8.31 billion in 2002 from US$6.37 billion in 2001 and was recognized by Interbrand Corporation as the fastest growing global brand.26 As one of its emphasized fields, Samsung endows mobile handset market with great efforts. It was reported that the expenditure of total R&D in Samsung reached 5 billion USD, including 2 billion especially for mobile handset R&D. Moreover, as an industrial newcomer compared with Nokia and Motorola, Samsung adopt several special developing strategies to overtake advanced companies, for example:
Samsung prefer cooperation with strong technology leader to research alone. Samsung plays more attention on how to obscure know-how in shorter period, and to avoid confrontation with powerful competitors. Then, through reverse engineering, Samsung can absorb the newest technology with high efficiency. Based on owned technology, Samsung inclines not to further dig, but to emphasize on developing additional value of product in order to occupy the market rapidly. Its not difficult to understand that Samsungs mobile handset exhibits first design and fashionable appearance, the important feature attracting majorities of users. This feature benefits Samsung to be among global top 3 brands of mobile handset. 26 Accessed on Feb.23rd, 2007, Samsungs Managing Philosophy, http://china.samsung.com.cn/public/gongyi.asp?sm=menu7 Expand rationally based on technology on hand. At present, Samsung has occupied already 65% of CDMA market in Korea, and the target at 20%30% CDMA market share in China has become its next step, which means about 7.5-11million handset units. Believably, along with the deeper cooperation between Samsung and Qualcomm Incorporated, which is the owner of CDMA patent, Samsung will achieve more opportunities on market of CDMA handset, which is used by nearly 1/3 of global mobile user. In conclusion, Samsung, as an active and ambition participant in mobile industry, has found a unique way to boom, and has grown to be an important industrial power unable to be neglected.
However, indigenous brand soon began to decline all- the- round, with a market share of less than 40% at the end of 2004. During 2005, this declining trend continues, with 10 more percent market share lost than 2004 at the year-end. Relying on indigenous marketing advantage and OEM technology, domestic mobile handset manufacturers, as a whole, have grown up and gradually captured medium and low-end market. Although they encounter fierce competition and face present embarrassment, and even 3 brands that is Kejian Pandan and Gaoke fade away in 200527, certain individual brand still actualize rapid development against the current and emerge. It is Lenovo that achieved 4.1% market share and ranked 7th in 2005; by contrast, its market share rises to 6.5% with a rank of 4th in June 2006 (from IDC report), an achievement invigorating all indigenous brands. 28 Considering the advantages of indigenous brands such as: flexible distributing- channelssensitive price reflectionstrong end-user networks and deep understanding of domestic fashion trendwe have no reason to doubt the future of indigenous handset development. In addition, Chinese government has shown its resolution to support domestic handset companies; surely the relative policies will be improved further. It is believable that indigenous brands, as a whole, will soon rally to enhance their market position. Generally speaking, due to the recent situation of handset industry in China including the advent of 3G, all the brand vendors are adjusting each competitive strategies referring to individual inherent and existing advantages. In a word, new turn of reshuffle on handset industry in China is unveiling. 27 Accessed on Feb.23rd, 2007, March 16th, 2006, by Pengxuzhi, http://mobile.csonline.com.cn/jzsl/200512/t20051228_423095.htm 28 Accessed on Feb.23rd, 2007, Lenovo handsets market share, Source: IDC, http://telecom.chinabyte.com/243/2576243.shtml
comprehending the rationality of Nokias competitive strategies to use Porters Five Forces model to analyze the competitive environment where Nokia is operating in China, before expounding Nokias detailed competitive strategies.
1. Theory Brief
Five Forces Analysis is a method used to contrast a competitive environment. It has similarities with other tools for environmental audit, such as PEST analysis, but focuses on an industry. It looks at five key forces namely the threat of entry, the power of buyers, the power of suppliers, the threat of substitutes, and competitive rivalry. Porters five-force model is arguably the most influential analytical model in strategy. In practice, it is best applied to cases in which strategic decisionmaking is closely associated with industry conditions. Porters Five Forces of Competitive Position
groups). And Porters emphasis on the importance of external context is balanced by Barneys insistence that sustainable advantage depends as much or more on the internal resources of the firm. As Jay Barney argued that sustainable competitive advantage is not the product of correct position in the external environment but is derived from the firms internal resources. More specifically, resources must meet four criteria to confer sustainable competitive advantage. They must be valuable, inimitable, rare and nonsubstitutable.30
37 units in the end of 2004.32 Apparently, its impossible for a company to win without taking exact competitive strategy.
1. Economies of scale
From common viewpoints, when more units of a good or a service can be produced on a larger scale, yet with (on average) less input costs, economies of scale are considered to be achieved. Certainly, economic growth may be achieved when economies of scale are realized.33 However, the effect of economies of scale deters entry by forcing the aspirant either to come in on a large scale or to accept a cost disadvantage. Scale economies can also act as hurdles in distribution, utilization of the sales force, financing, and nearly any other part of a business. 31 Accessed on Feb. 23rd, 2007, India and China to Drive Handset Market Growth, Cellular-News Source: ML estimates, http://www.cellularnews.com/story/20374.php 32 Accessed on Feb.23rd, 2007, MII Brewing Handset Exit Mechanism, Nov. 2005, Source: First Finance and Economics Daily, http://comm.ccidnet.com/art/1569/20051104/364877_1.html 33 Accessed on Feb.23rd, 2007, What are economies of scale by Reem Heakal, Jan. 27th, 2003, http://www.investopedia.com/articles/03/012703.asp Theoretically, economies of scale can be divided into internal and external economies of scale34. Generally, when a company reduces costs and increases production, usually through division of labor and specialization, internal economies of scale have been achieved. External economies of scale occur outside of a firm, within an industry. Thus, when an industry's scope of operations expands due to, for example, the creation of a better transportation
network, resulting in a subsequent decrease in cost for a company working within that industry, external economies of scale are thought to have been achieved. E.g. In 2002, Nokia invited its main global partners including mainly hardware providers to invest about RMB 10 billion together in Star Net Industry District in order to form integrated production capabilities and to decrease cost. And Motorola invested USD 1.7 billion in Tianjin to build its integrated circuit base. Surely, with external economies of scale, all firms within the industry will benefit. External economies of scale can be reaped if the industry lessens the burdens of costly inputs by sharing technologywell-known brand and managerial expertise. As is well known, transnational companies spare no effort in constructing brand and investing in R&D. E.g. it is as early as 1991 that Nokia established its brand constructing strategy, and from then on, Nokia has invested heavily in brand polish and maintenance. According to the market investigation by IDC on Dec. 7, 2006the results of recent multi-client study and survey of mobile phone and smart phone subscribers across five countries reveals that top global brands are in demand not only in developed countries such as the U.S., U.K., and Germany, but also in emerging countries such as India and China. The relative influence of brand on product choice (especially in China and India) suggests that many people seek out global brands and the prestige that they carry.35 34 Accessed on Feb.23rd, 2007, the definition of economies of scale, http://www.investopedia.com/terms/e/economiesofscale.asp 35 Accessed on Feb.23rd, 2007, IDC Finds Mobile Brand Preferences Vary by Country, Dec. 7 2006, IDC-CEMA, http://www.idccema.com/newsletters/January07/brand_preference_country.html
2. Product differentiation
Advertising, customer service, being first in the industry, and product differences are among the factors fostering brand identification. And, brand identification creates a barrier by forcing entrants to spend heavily to overcome customer loyalty. On the one hand, companies may compete by changing the characteristics of the product they sell. The idea is to make product different to appeal to a different "market niche." Thus, competing companies may attain its market
share and charge a price premium through reduced price sensitivity and reduced directness of competition. On the other hand, new comers aim at existing niche market will inevitably face the established brand identification and customer loyalty. Necessarily, large expenditure is needed to fade the brands in a given segment and build own product image. The objective of this strategy is to develop a position that potential customers will see as unique. If your target market sees your product as different from the competitors', you will have more flexibility in developing your marketing mix. A successful product differentiation strategy will move your product from competing based primarily on price to competing on non-price factors (such as product characteristics, distribution strategy, or promotional variables). In fact, giant international mobile manufacturers have continuously strengthened their technology investment and developed their core technology, in order to establish their leading positions in the mobile handset industry. Motorola, as an example, has been a global leader in innovation in telecommunications. In China, Motorola has invested US$500 million in R&D, building more than 10 R&D centers and labs in Beijing, Tianjin, Shanghai, Nanjing, Chengdu and Hangzhou. The number of R&D staff has surpassed 2500 in 2005. 36 36 Accessed on Feb.23rd, 2007, Motorola in China -Introduction http://www.motorola.com.cn/about/inchina/ Generally, the major sources of product differentiation are as follows: Differences in quality or design among output Ignorance of buyers regarding the essential characteristics and qualities of goods they are purchasing Pervasive sales promotion activities of sellers and, in particular, advertising Possibility of developing significant product differentiation through advertising is greatly enhanced for so called gift goods or prestige goods
Differentiation in the locations of sellers of the same good where the product fills no technical function but rather can satisfy many different sort of personal needs or uses (psychological or physical).
3. Capital requirements
The need to invest large financial resources in order to compete creates a barrier to entry, particularly if the capital is required for unrecoverable expenditures in up-front advertising or R&D. Capital is necessary not only for fixed facilities but also for customer credit, inventories, and absorbing start-up losses. While major corporations have the financial resources to invade almost any industry, the huge capital requirements in certain fields, such as mobile manufacturing, limit the pool of likely entrants. For example, at the end of 2005, Motorolas total cumulative investment in China reached US$3.6 billion, making it one of the largest foreign investors in China. Similarly, in 2005, Ericsson further proved its long-term commitment by announcing a USD 1 billion investment for the next five years in China to strengthen its competent capability37. It is arguably that almost all famous foreign mobile companies in China such as Nokia, Sony-Ericsson, and Samsung, along with domestic organisations such as Haier, TCL, and Amoi, possess sufficient 37 Accessed on Feb.23rd, 2007, Ericsson Taking you forward, China Association of Enterprises with Foreign Investment (CAEFI), http://caefi.mofcom.gov.cn/aarticle/jingmaoxinxi/huiytj/200609/200609032951 72.html Capital to support their industrial investment. Almost every one of them finance their project from stock market. To sum up, new entries need vast capital input to catch up along the high speed of mobile industrial progress, and bear the high risk of investing lose out.
inflation prices, government subsidies, or favourable locations. Sometimes cost effective advantages are legally enforceable, as they are through patent. From the viewpoints of new contenders, they should first persuade customers to try new brand mobiles at the expenses of large expenditure, which is switching cost. Normaly, consumers are sensitive to the relevant advantages and disadvantages of any change from the status quo. Switching costs deter existing consumers to change their consuming habit. When facing switching costs, the rational consumer will not switch his supplier. Fortunately, the market segment aimed by mobile producer is mainly designed concentrating on the young and active people group, whose major objects are novelty, fashion, and pattern. With the precondition of continuous innovation and technology improvement, such cost disadvantages will not construct insurmountable barrier. However, in short-term, a vast majority of new comers will be Chinese domestic handset companies because of the new policy limiting the foreign brand in China. Being late in mobile handset manufacturing industry, domestic novices should cost big amount of capital to buy special technology to support each day manufacture. It is without question that both the profit margin of domestic handset and growing potential will be largely limited under the huge technical expenditure.
a) Retail outlets which are owned by your organisation or by an independent merchant or chain b) Wholesale outlets which are of your own or those of independent distributors or the brokers c) Sales force compensated by salary, commission, or both d) Direct mail via your own catalog or flyers e) Telemarketing on your own or through a contract firm f) Cybermarketing, surfing the newest frontier g) TV and cable direct marketing and home shopping channels So far, the top foreign mobile companies in China such as Nokia, SonyEricsson and Motorola, they totally use a mixture of methods to sell their products, but mainly accept general agent as their major distribution form. When entrusting several general distributors to sell their products through different agent layers, mobile producers can share the capital advantage and web resources from the agents, and the resulting high speed of distribution. However, this kind of distribution form will also engender such problems as price competition among different agents and lose of control on end-users. As a contrast, Chinese domestic mobile companies such as Amoi, Haier and TCL, they usually take the distribution form of direct selling via supermarket and build their own sales force. Although this form need relatively long time to train team and extra money to invest, producers can contact retail terminal directly and can attain tough control over market. Under the fierce competition in mobile industry in China, the distribution form accepted by domestic manufacturers indicates an empirical method for other new comers.
6. Government policy
The government can limit or even foreclose industries with such controls as license requirements and limits on access to raw materials. The government also can play a major indirect role by affecting entry barriers through controls such as air and water pollution standards and safety regulations. In China, companies should obtain the license first from MII before launching new handsets. Up to the end of Jan. 2006, there are totally 70 licenses
granted to 57 companies to produce mobile phone, including GSM mobile and CDMA mobile.38 According to Chinese National Development and Reform Commission (Abbr. NDRC hereinafter), from Feb. 2005 on, the former examine and approve system for mobile license will be terminated, and new system by the form of sanction will be carried into execution. Although new system appears to be relatively looser in comparison with previous one for companies to join in handset industry, to prevent mobile surplus due to fiercer competition among mobile industry, MIIC still sets other doorsill such as least investing amount to limit new mobile producers. So, new comers can only join handset industry via 2 appropriate ways: one is waiting for administrative approval (or, sanction), the other is buying license from existing 38 Accessed on Feb.23rd, 2007, 70 license countrywide since the 5th group, Source: South City Newspaper, http://it.sohu.com/20060126/n241617481.shtml mobile manufacturers or considering co-operation with incumbents. Inevitably, each approach will cost heavy expenditure to the new contenders. Obviously, government policy do build entry barrier to new entry.
7. Competitors Retaliation
Moreover, the potential rivals expectations about the reaction of existing competitors also will influence its decision on whether to enter. The company is likely to have second thoughts if incumbents have previously lashed out at new entrants. Evidently, potential rivals should face the following reaction by incumbents: As it is mentioned above, there are now about seventy companies granted license to produce mobile, and with the reformation of approval system, more competitors have opportunities to enter. According to the information from NDRC, domestic mobile producing capacities increase fastly, the annual mobile output will reach 0.5 billion, while the estimated operating time is only 50%. Apparently, there exist serious producing capacities surplus. The top mobile producing incumbents (especially foreign top 4 companies in China such as Nokia, Motorola, Sony-Ericsson and Samsung) have experienced very long period to strengthen their vertical chain
integration, which prevents new comers from sharing upstream and downstream resources. Price promotion regularly, gradually becomes a common means to attract potential consumers and compete for consumers sincere to other brands. So, new comers to mobile industry should debase their original profit estimation to adapt to the market shift. All the above measures construct certain difficult defence barriers by the incumbents. Under the threat of incumbents retaliation, new contenders had better to rectify their actual plan to avoid possibly fatal risks. According to the existing position, trans national brands already took up the top position of handset industry in China, grasped developing opportunities, and formed the barrier to after entering rivals.
From the viewpoint of native manufacturers, most of them established their own distribution channels, targeting at the second, third and fourth level markets. One possible reason to carry out direct supply and selling model is probably not able to share the existing channels controlled by top incumbents. The other is that this model benefits terminal grasp and market influence. However, with a long and deep distribution channel plus a huge number of channel maintainers, the sales cost went high. Moreover, long distribution channels caused overstock and long period of capital return. In fact, no matter what methods a company will adopt, it should actualize a comprehensive analysis and count the cost before making its final selections, because each approach takes its merit and shortcoming. For example, if general agent system is adopted, the negative effects should like: lack of control on retail-terminalspressure on selling price due to competition among agentsdifficulty to track goods flowing direction and so on. Practically, manufacturers should adopt some patterns fit for their present distributing need, and moreover, they should modify their channels to keep up with the turbulent selling market. For instance, in order to move close to market and form flexible decision mechanism, mobile manufacturers prefer flat and multi-mode selling structure. Generally, with the increasingly intensified competition among handset industry and relatively less differentiated handset products, the buyers (from the viewpoint of handset manufacturers, mainly levels of wholesalers) exhibit their strong position in face of manufacturers. In certain situations, some manufacturers can hardly survive without the support of few giant distributors.
squeeze profitability out of an industry unable to recover cost increases in its own prices. Theoretically, a supplier is powerful if It is dominated by a few companies and is more concentrated than the industry it sells to. Its product is unique or at least differentiated, or if it has built up switching costs. Switching costs are fixed costs buyers face in changing suppliers. Such as a buyer has invested heavily in specialized ancillary equipment or in learning how to operate a suppliers equipment, or its production lines are connected to the suppliers manufacturing facilities. It poses a credible threat of integrating forward into the industrys business. The industry is not an important customer of the supplier group. If the industry is an important customer, suppliers fortunes will be closely tied to the industry, and they will want to protect the industry through reasonable pricing and assistance in activities like R&D and lobbying. Actually, successful top mobile manufacturers care every details of cooperation with their main suppliers. Take Nokia as an example, close cooperation with customers and suppliers is one of its core development principles. It allows end-to-end efficiency and speed key success factors for the entire supply chain. While openness and trust are important aspects when working together with suppliers and driving compliance, Nokia requires that all products and services sold under the Nokia brand be sourced according to practices which uphold internationally accepted standards. These sourcing practices also need to comply legally with human rights and workplace practices throughout the value chain. Nokia is constantly developing its processes and overall supply-demand network set-up to efficiently meet this growing demand. Through regular supplier assessments, Nokia use to promote good performance of suppliers and also to monitor their compliance. 39 Motorola, another mobile giant in China, has goals for inclusion of Diversity Suppliers and 39 Accessed on Feb.23rd, 2007, Corporate Responsibility of Nokia, http://www.nokia.com/A4126690
maintains management accountability for achievement of these goals. Motorola endeavors to conduct business in compliance with law and widely accepted norms of fairness and human decency (From Motorola Code of Business Conduct40), and looks to its Suppliers to act in a similar manner. These principles are as follows: compliance, anti-corruption, no unfair business practices, anti-discrimination, no forced labor, no-child labor, freedom of association, fair working hours and wages, safe and healthy working condition and environmental sustainability. Generally speaking, the tremendous upstream factories can ensure sufficient supply of goods, however, the leap of applying new technologies used to disturb the normal rhythm of goods delivering, and thereby to block new handset launch under plan. To iron smooth the possible fluctuation of upstream supply, leading handset manufactures have already been strengthening administration on suppliers to establish solid foundation for stable quality of goods, sustainable development and mutual-benefit in the future. Attentively, neglect of building mutually strategic cooperation with upstream suppliers will lead to out of stock on key hardware sometimes and thereby loss of advantageously marketing opportunities.
product of the product or differentiate it somehow, the industry will suffer in earnings and possibly in growth. In the field of high technology application, major manufacturers keep heavy R&D investment continuously attempting to lead the new product innovation. And the development of high technology has given birth to high degree of technology-integrated mobile product: smart phone, which is a result combined from PDAmobile and other functions. As is reported, the market of smart phone experienced a high sell increase of 120% in 200541. At the same time, the mobile handset becomes more and more multifunctionalwhile PDA equipment becomes increasingly portable. Along with the large scale of launch of smart phone by mobile manufacturers and PDA enterprises simultaneously, the price will hopefully drop at a wide range, a course indicating that the substitute effect of high-end PDA mobile for single function mobile will be intensified. From another point of view, relying on the advantage of low fee and low cost of handset, wireless local call (named Personal HandyPhone System, abbr. PHS hereinafter) becomes a strong substitute for mobile telephone and attract great lots of low-revenue people. As a means of complement and extend of fixed telephone, PHS user in China has overpass 85million at the end of 2005. With the improvement of servicefurther exploitation on functions and expanding effectively in the country area, the future of PHS in China can be optimistic. In other words, the substitute effect of PHS for mobile telephone in specific crowd likewise deserves to expect. In a word, to counteract the substitute effect, mobile functions should be designed to meet the special demand of target people, which should be based on the detailed market investigation. 41 Accessed on Feb.23rd, 2007, The market share of smart phone, by Chengtangan, Apr. 11th, 2006, China Economic Net, http://www.ce.cn/cysc/communications/yjdt/200604/11/t20060411_6659747.s html
Competitors are numerous and generally equal in size and power. There exists impulse to reallocate current market share when industry growth is slow. The product or service lacks differentiation or switching costs, and is easy to be attacked by market raiders. Fixed costs are high or the product is perishable, creating strong temptation to cut prices. Capacity augmentation is out of control and often leads to periods of overcapacity and following price-cutting. High exit barriers, like very specialized assets or managements loyalty to a particular business, keep companies competing even though they may even bear negative returns on investment. These factors build into industry economies. And, due to the interaction and interdependence among industrial members, rational application of competitive strategy such as advertising war and technology upgrade, will improve not only the rival sponsors living condition, but also the economic environment of the other participants in the same industry. While, some strategies, such as malicious price cutting, will deprive competitors of potential profitimpair their potential capacity for future development and even threaten their survival condition. According to report on global handset market, the top 5 manufacturing companies are Nokia, Motorola, Samsung, LG, and Sony-Ericsson, with their global mobile phone market of 35%, 16.3%, 12.1%, 7.2% and 6.9% respectively. Among the top 5, Nokia attained 35% of the global mobile phone market in Q4 2005. Its market share grew from 33% in Q4 2004, while Motorola climbed to 16.3% on the back of its popular RAZR thin phone and ultra cheap models it has introduced for emerging markets. Nokias highest ever market share was in 2002 when it achieved 35.8% for the year. Its highest market share in a single quarter was 36.9% in Q4 2001. Samsungs market share slipped to 12.1% from 12.2% in Q4 2004. (blogs.zdnet.com) Apparently, there exists market share gap between no.1 and no. 2; its unimaginable to weaken Nokias leading position on the international mobile market in foreseeable period.
According to research on Chinese domestic handset market, at the end of 2005, the top 5 mobile handset manufacturers in China are in turn: Nokia, Motorola, Samsung, Bird, and Amoi, with holistic mobile selling market share of 23.8%, 13.3%, 9.6%, 6.1% and 4.2% respectively. Compared with previous top list, the market positions of first 3 companies still keep relatively stable; while the domestic mobile handset producers such as Bird and Amoi begin to make a figure.
has achieved successively high rate of global selling market share of mobile handset. It is well known there is no way to remedy false strategy with correct tactics. That Nokia can develop from a common foreign company to number 1 of Chinese mobile phone market in about 10 years indicates its successful employment of competitive strategy. And relative analysis is as follows:
Cost leadership
The companies try to become the lowest-cost producers in an industry can be regarded as those following a cost leadership strategy. The company with the lowest costs would earn the highest profits when the competing products are essentially undifferentiated, and selling at a standard market price. Companies following this strategy focus on cost reduction in every activity in the value chain. It is important to mention that a company that is a cost leader does not necessarily mean that the companys products would have a low price. In certain instances, the company can for instance charge an average price while following the low cost leadership strategy and reinvest the extra profits into the business (Lynch, 2003). The risk of following the cost leadership strategy is that the companys focus on reducing costs, even sometimes at the expense of other vital factors.
Differentiation
Porter (1980) argued that for a company following a differentiation strategy, there would be extra costs that the company would have to incur. Such extra costs may include high advertising expenditure to promote a differentiated brand image for the product, which in fact can be considered as a cost and an investment. On the other hand, when a company differentiates its products, it
is often able to charge a premium price for its products or services in the market. Differentiation has many advantages for the firm, e.g.: successful differentiation strategy of a firm may attract competitors to enter the companys market segment and copy the differentiated product (Lynch, 2003). Differentiation can be achieved through a differentiated product, superior quality, and customer service etc. A key question to ask is whether the customers of the company perceive the point of difference as one that is worth a price premium.
Focus
As Porter noted, Organizations can make use of the focus strategy by focusing on a specific niche in the market and offering specialized products for that niche. Therefore, competitive advantage can be achieved only in the companys target segments by employing the focus strategy. In order to occupy a small and specialized group of buyers, a company probably charges a premium price for superior quality (differentiation focus) or offers a low price product. The deficiency of the focus strategy is that the niche is usually small-sized and may not be significant or large enough to attract a companys attention. And the focus on costs would be difficult in industries where there is lack of economies of scale. Moreover, there exists the risk that the niche may disappear, as the business environment and customer favorite change flukily. Theoretically, the danger some organization face is that they try to do all three and become what is known as stuck in the middle. If a company has no clear business strategy and attempt to cover all consumers, the resulting additional running costs will eventually cause a fall in sales and market share. Stuck in the middle companies are usually subject to a takeover or merger.
their owned technologyknow-how and other resources in their product development. Apparently, high investment in R&D of fundamental and applicable technology builds better quality products and thus causes naturally the selection of differentiation strategy among 3 generic competitive strategies. In the field of mobile phone industry, the most important representation of differentiation behaves as the capability of technology innovation. According to the investigation by ), and leads the mobile phone industry. BusinessWeek in April.2006, i.e. the Top 100 Innovative Companies RankingNokia (ranks 8th) largely exceeds other famous mobile handset manufacturers such as Samsung (12th) Sony (13th) Motorola (30th) Philips Electronics (67th42 To strengthen application of high technology to meet the changing taste of consumers and to adapt the fugacious competitively economic environment, Nokia adopts the following tactics:
Moreover, Nokia invested a postdoctoral scientific working station in China in 2004, in order to improve the core competence of research on high technology relying entirely on indigenous talents. 42 Accessed on Feb.23rd, 2007, The Top 100 Most Innovative Companies Ranking, 24 April 2006 special report, BusinessWeek Online http://www.businessweek.com/magazine/content/06_17/b3981413.htm As a result, Nokia has possessed sufficient technology reserve for its foreseeably future development on the global market including China. Emphasizing on the importance of individualized handset design.43 Nokia realizes deeply that handset is not used only as a telephone, but more often used as something of show cool than its basic function. Along with the gradually mature technology of mobile phone, distinguished and individualized design become more eminent above all other factors to attract consumers. Nokias design experts have come together into a single team with a broad understanding of what people want from their mobile devices. Alongside them, armies of trend spotters hunt out the latest in-thing, taking their inspiration from whats going to be hot in the worlds of fashion, art, architecture and other creative industries. This is the wellspring of Nokias human approach to design; understanding consumers and key trends, then interpreting these into products that look and work the way people want them to. Design is at the heart of Nokias business, because the increase of the demand for consumers personalizing their mobile phones in truly original ways is an important emerging trend. Imaginably, Nokias design ethos lies far deeper than aesthetics and practicality. Fashion, religion and even weblogs are providing the human inspiration behind its mobile phones. And inimitable design has melted into Nokia brand forming its unique characteristic, which also contributes to the construction of long-term vitality of brand.
http://www.businessweek.com/magazine/content/06_29/b3993071.htm?camp aign_id=search While Nokia gradually develops its full series of handsets to cover the different levels of consumers in China, it exhibits its ambitious marketing target of occupying whole market segments. Although Nokia possesses strong capacities of R&D and manufacture, the ability of delivering products to endusers efficiently and effectively is yet to be improved. Select marketing route in consideration of internal resources of company Apparently, high and medium end market is not the largest part of Chinese mobile phone, but, at the beginning, Nokia does not put its emphasis on massive low-end market. The reasonable explanation can be estimated like this: 1. At the beginning, when Nokia entered just into China, there are seldompowerful competitors in the mobile phone industry and there are sufficient spaces in the segment of medium-high end market. In this part of market, the selling profit of mobile phone is much higher than that in the crowd market. The selection of marketing high-end users is reasonable and will help to establish the superior brand image in Chinese. Without question, the advertising effects of excellent brand stay deeply in the heart of consumers and last for long period. 2. During the prime period in a new market, priority of large scale and output will inevitably cause unsure quality and overpass practical demand in some certain market segment. On 8 May 2000, Nokia invited 20 odd cooperating companies domestic and aboard to invest 10 billion RMB in StarNet industry district in Beijin Economic and Technology Developing Zone. The original target is to integrate resources lessen expenditureensure high qualityand actualize zero stock. Evidence proves that the Nokias mobile handset industrial chain is successfully constructed there and relevant participants improved their competences as well. Until the integrated and effective industrial chain was established, Nokia did not stride forward. As Colin Giles (newly appointed president of Nokia in China in 2006) pointed out in the 2007 entire mobile living subject activity, that there are 3 reasons i.e.: quality falling short of consumers expectationlack of sustainability by over-
expandinginadequate investment on R&Dwhich implied why the indigenous brands give ground.44 In conclusion, Nokia did not simply conform to Porters differentiation strategy, but combined the market condition with its internal resources to determine what should to do. According to the practice in market, Nokia selected its own marketing strategy, which guides the company to nibble Chinese mobile handset market from high end to low end with stable pace, shifting its emphasis from profit to market share. Embracing the tenet of distributing channels determine success Nokia knows that China is a very large and complicated market; a company cannot deliver rapidly its high-quality products to its end-consumers without very effective and powerful distributing network. So, it is believed by Nokia that its success rests with the establishing of the above-said network. Simultaneously, under the condition of excess supply of mobile phone, the distributors begin to obtain power to bargain with upstream manufacturers. And without extra benefits, they will concentrate no effort on certain individual brand. On the other hand, as same as other consumables, handset begins to come into various supermarkets. This constitutes a practical threat to the existing distributing networks of mobile handset industry. Once the new relationship between handset dealers and manufacturers establishes as such, the distributing merchants and retailers will inevitably determine the fate of the whole industry. Based on the above understanding, Nokia takes its steps as follows: 1. Before 2000, Nokia took up with the distributing tactics of finding several nationally general agents such as China Postal Mobile Communications Equipment co. LTD (abbr. CPMCE 44 Accessed on Feb.23rd, 2007, Nokias New President-Colin Giles Comments on the Reasons Why Chinese Domestic Handset Makers give grounds, by Yuyiwan, Dec.1st, 2006. http://telecom.chinabyte.com/462/2695962.shtml hereinafter) and Shanghai CellStar International Trading Co. LTD (abbr. SHCS hereinafter), which help Nokia to spread handset selling via 3 levels of dealers. At that time, 3 levels of deals selling system is traditionally the main and available channel to distribute products countrywide probably.
2. At the same time, Nokia found that, only by general agents, its products can only sell fluently to first level large cities, such as Beijing, Shanghai, and Guangzhou, etc. To further open the market of provincial and municipal cities, Nokia initiatively developed provincial distributors. The number of such dealer has expanded to nearly 100 in May. 2004 compared with 20 odd in Jan. 2003. Evidence proves that this system successfully deliver large amount of Nokia handset to a great lot of families45. 3. Along with the construction of 3-level selling system, Nokia began to test its direct retail approach based on the result of cooperation with retailers in Shanghai e.g. Shanghai Guangda Telecommunication Tiandi Co. Ltd. After affirmed the performance of this approach, Nokia extended this system. In 2002, a special group named DRP (Direct Retail Program) came into existence, which is especially responsible for providing products to retailing markets. From then on, Nokia has signed cooperating agreements with series of home appliance concatenating retailers such as Gome, Dixintong, Yongle, and Cnsuning and so on. As is evident, Nokia has gradually established its multi-levels and multichannels of distributing system. And there coexist 4 types of selling system in Nokia, that is nationally agentsprovincial agentsprovincial mix of direct dealers and distributorsand direct retail systems. As a result, Nokia can now penetrate promptly its products throughout the whole country both at a full extent and with a great depth. While neither wholesaler nor retailer can radically and 45 Accessed on Feb.23rd, 2007, Nokia-Trained With Chinese Kungfu, Mar. 17th, 2005, Source: U88 forum, http://zs.u88.cn/html/tbqh/20053189355816308.htm adversely influence the normal selling of Nokia in China, because none of them has crucially controlling power over the distributing channels. Clearly, Nokia has established successfully its solid distributing network with less medium chains and levels, which presses close to market and ensures the annually launch of 40-50 new styles products in the market.
At Nokia, it is believed that people are its most valuable resource. The Nokia Way means providing individuals with a platform for personal growth in a challenging environment with a clear vision, goals, and shared management principles. Nokia brings together talented individuals who share these principles, and therefore share success. Nokia thinks highly of the localization of talents. At present, there are 5.5 thousand persons hired by Nokia China, 95% of whom are local people. And the whole administration is nearly comprised of Chinese.46 In order to help employees to confront effectively the challenge of current telecommunication industry in China, Nokia is improving its administrative education through specially established Nokia Chinese Institute and the cooperative EMBA program with Beijing University. Due to the great efforts on cultivation on talents, the annual ratio of employee turnover is less then 5%, a relatively low number among all the hi-tech industries. As is well known, the determining factor on the success of a company lies on talents. Strategically, the particular environment of taking care of people in Nokia builds harmonious and stable circumstance in the company. Furthermore, this constructs Nokias core competence in the long run. 46 Accessed on Feb.23rd, 2007, Nokias strategy of localized human resource, by Dr. Yangweiguo, Oct.8th, 2006, http://blog.hc360.com/portal/personShowArticle.do?articleId=77369
There is special network to collect market information in Nokia in China. And there are more than 300 marketing people belong to market department, who collect all kinds of data and information every day. And the collected materials will be handed in at the very day without any delay, to deliver different market analyzing groups to do research. Because the different group is responsible for different aspect of certain product, the report will be very soon. And Nokia will soon learn much important evidence such as the feedback of consumers and how many handsets sold by a retailer in ten days, etc.
implemented, and more and more companies will be attracted by the high rate of industrial growth. Thus, one available countermeasure Nokia can employ is its differentiated products compared with those of other competitors. Relying on the users royalty based on the superior brand image, Nokia creates its brand identification, which creates a barrier by forcing new entrants to spend heavily to overcome customer loyalty.
Under the vast investment in R&D, Nokia insists on technology innovationrefurbishing handset appearance and shaping superior brand image to keep increasing consumers royalties to Nokia brand. In addition, Nokia takes actively part in other territories such as 3G, PDA, and game etc. in order to grasp the front tendency of mobile phone. Nokia can now hold on the position to lead the tide of industrial development in the future. As a result, Nokia can defend itself against the threat of substitutes successfully, and shape itself a prominent position.
Surpassing competitors
In virtue of its differentiated strategy, Nokia focus on keeping technology aheadmaintaining figure eminentensuring function powerfulproviding after-sale service high-qualityand keeping reaction to market fluctuation quicker, all these characteristics of Nokia construct synthetic advantages when compared with other brands. Clearly, other competitors can hardly overcome the consumers royalties without extra large expenditure. Thus, Nokia established solid comparative advantages to participate industrial competition, which adversely hold back other contenders effectively. In conclusion, although there are many similarities( as mentioned in Chapter 3) in their competitive strategies adopted by 3 main competitors (Motorola Samsung, and Nokia), and even sometimes the market was driven by new products from Motorola and Samsung ( e.g. Razor series and X series respectively), this temporary lead cannot shake the top 1 position of Nokia, which is established on holistic strength and balanced development of every aspects. (Detailed comparison out of the report and not spread here)
Along with the developing of mobile phone market in China, there begin to emerge newest market characteristics, some of which constitute the key parts of whole industrial chain and probably sometimes reshape the industrial situation, thereby should be emphasized as follows:
develop 3G mobile systems. Next step, the supervising department will keep ready to stipulate detailed regulation and technological standards to drive the progress of 3G effectively. Simultaneously, the relative operating companies should make adequate preparation for the 3G businesses at hand49. This address (on Dec. 27th, 2005) indicates the Chinese official opinion on 3G, and undoubtedly, unveils the advent of 3G in China in the near future. Reportedly, Mr. Xuqin (the official of NDRC, and department chief in charge of the high-tech industry) expressed clearly during the 2007 Chinese Industrial Development Reporting Conference on Nov.10, 2006, that the relative cities of 2008 Olympic game will be definitely offered 3G services. And in fact, from the end of Mar. 2006, 5 cities have been selected as the testing base to check the outdoor capabilities of TD-SCDMA. 48 Accessed on Feb.23rd, 2007, Custom-made handsets, Chinas telecommunication Industry in 2004, Asia case research center of Hong Kong University http://www.acrc.org.hk/promotional/promotional_shownote.asp?caseref=889& page=8 49 Accessed on Feb.23rd, 2007, The address on the working conference of national information industry by Mr. Wangxudong (Minister of MII), 27,Dec. 2005. From Website of Ministry of Information Industry of the Peoples Republic of China http://www.mii.gov.cn/art/2006/01/25/art_223_5563.html Evidence proves that 3G is drawing near in China.
At the time of alliance establishment, the output of whole organization has gone beyond 10 million units every year. The amount implies that the alliance has possessed prime abilities to compete with certain overseas brands during materials purchasing. Relying on the agreement among members, this new operating model is estimated to save large amount of manpower and material resources, as well as improve the reaction speed to the market undulation. As is reported, the above-mentioned alliance was established under the situation that the centralized degree of handset-manufacture is further enhanced in 2005 in China. According to the statistics from MII, the 2005 output and sale of top 10 handset manufacturers of China has occupied 78.7%78.4% of the whole industry, a large increase from 72.9%72.8% in 2004.51 Namely, economies of scale have grown to be an increasingly important factor for new entry to 50 Accessed on Feb.23rd, 2007, The announcement of establishment of first domestic handset alliance Source: Beijing Modern Business Newspaper 31,Oct. 2005 http://news.xinhuanet.com/mobile/2005-10/31/content_3706094.htm 51 Accessed on Feb.23rd, 2007, The produce and sale of handset in China in 2005 exceed 0.3 billion unit, Mar. 3rd, 2006, Source: The Electric Newspaper of China, http://info.it.hc360.com/2006/03/031018131744.shtml handset industry when mobile phone is more and more becoming a type of popularized and everyday electronic consumables.
Due to vastly potential demand of handset in the broad countryside market in China, it is optimistic for the local handset exclusive store to boom up in the near future.
electronic equipments and appliances cannot be realized. There is still distance to really mobile convenience via smartphone in China. In fact, smartphone is the rudiment of high-end 3G terminal; the content of 3G is determined by the handset function in the end. There is an unprecedented opportunity for smartphone to make great strides to greet 3G.
Network operators become the major powers on mobile phone distributing channels
According to the experience derived from the western countries that have operating 3G already, the leading actors of mobile industry in 3G era will be acted by various commerce operators, which consist of network operatorsresale operators and virtual operators.54 A mobile network operator, also known as wireless service provider, wireless carrier, mobile phone operator, or cellular company, is a telephone company that provides services for mobile phone subscribers. A resale network operator is entrusted by system operators to provide service, which needs taking advantages of brands of system operators and should conform to the set price rule. Another category of mobile network operator is called the Mobile Virtual Network Operator abbr. MVNO hereinafter. As far as the subscriber is concerned, they seem identical to regular mobile network operators. The
critical difference is that they do not own the underlying network, but lease it instead from another incumbent operator in that country. In order to allocate resources by market rules, governments of different countries so far have usually allocated spectrum through auction. For example, on April 27, 2000, the UK auctioned off five licenses for 3G wireless spectrum, raising a whopping $35 billion, which is a very heavy burden upon the commerce operators. In order to partake of the huge expenditure, Resellers and MVNOs are welcomed to participate in and deliver value-adding services. 55 54 Accessed on Feb.23rd, 2007, The definition and classification of network operators http://en.wikipedia.org/wiki/Mobile_phone_operator 55 Accessed on Feb.23rd, 2007, Change Winners Curse the 3G auctions were the last party of an old regime, by Chris Anderson, Wired Magazine. May 2002. http://www.wired.com/wired/archive/10.05/change.html In 3G eras, along with the intensified competition among operators, various types of value-added application via 3G system will be increasingly deployed to stimulate users consuming appetite. However, divided by the different preference, the target customers snatched by operators will consist of multilevels and many small quantities of crowds. As is indicated by the experience of foreign 3G countries, in order to improve ARPU (abbr. Average Revenue Per User), operators should deploy more value-added operation aiming at given crowds. And this is usually actualized by the approach of handset binding, i.e. custom-made handset by operators. Currently, custom-made handsets only offer custom-made handset interfaces, such as initialized logo and united out-looking. It is estimated that future offerings will grow towards much deeper levels, e.g. unique navigation system and input mode. Through custom-made handsets, network operators are able to achieve advantages such as rapidly response to market fluctuation, maximize market segmentation, control handset costs and shorten launch time of handset. Of course, to transfer part of the heavy burden of 3G cost to handset manufacturers is also a vital factor of consideration. Apparently, China cannot keep out of the trend of tailoring handset by operators.
It is calculated, the custom-made handsets occupy about 70% of the whole handset sales in JapanSouth Koreaand Europe. The degree of acceptance of custom-made handset by users in China is under improvement.56
The standard of TD-SCDMA will inevitably take up a major position in Chinese mobile telecom market.
The three ITU recognized 3G technologies are: TD-SCDMA standard jointly developed by 56 Accessed on Feb.23rd, 2007, TD chip manufacturers want to turn over via custom-made handset of 3G ,Custom-made handset of 3G, . Source: CCID, 24 Aug.2006 http://eita.smexm.gov.cn/2006-8/2006824155602.htm Chinas Datang Mobile Communications Equipment Corporation and Siemens from Germany; WCDMA standard based on the global mobile communication network system, a system commonly used in Europe; and CDMA2000 standard, popular in USA using CDMA standards. Among the three, China owns more than 50% of the intellectual property of TD-SCDMA. Datang Telecom Technology Industrialization Group presented the technology to the International Telecommunication Alliance on behalf of China and the standard was approved in May 2000. As is reported, up to May. 2006, CDMA2000 is the most widely deployed 3G technologies, with 152 CDMA2000 operators in 68 countries, and 36 CDMA2000 1xEV-DO systems. Currently, CDMA2000 has 250 million users, and continues to hold a dominant share of the 3G markets57. Although Chinese government has announced that operators are free to choose whichever 3G standard they want, obviously it is a natural responsibility for any government to help establishing its national technology and industry. Relying on the support of MII, TD-SCDMA is hopefully becoming the major standard of Chinese mobile telecom industry in short term. Although, there is promise to offer 3G service during 2008, the Chinese government has yet to decide on how to issue the 3G licenses. One possible explanation is that, in order to prepare for the large scale of commercial application, the government needs more time to test its own TD-SCDMA standards and to perfect the industrial chain of TD league.
Apparently, the delay in issuing 3G licenses in China will benefit domestic entrepreneurs such as HuaweiZTE and Bird etc., but adversely deter the entry of international mobile phone giants such as Nokia, Motorola, and Samsung. 57 Accessed on Feb. 23rd, 2007, Quarter Billion 3G Subscribers Worldwide, 22nd May 2006 http://www.3g.co.uk/PR/May2006/3097.htm
Smartphone has necessity to solve its problem of compatibleness on different OS platform to facilitate efficiency and effectiveness
It has been mentioned above, that there is mutual dependent relation between 3G and powerful terminal. Without the support of handset, the superiority of 3G cannot be embodied. However, there are now mainly 3 kinds of OS on smartphone, so it cannot be convenient until united standard is adopted to establish compatible OS. Thus, one-off investment may bring broadest coverage and engender biggest yields. Along with the change in the selling market, it is increasingly probable that exclusive store for handset and concatenated retailers, as well as the aforementioned network operators will dominate the distributing channels. In addition, with consideration of the enhanced degree of centralized manufacture, it is urgent to reshuffle both upstream and downstream chains to adapt new situation. The excess supply of handset has foreshowed the advent of market maturation. In conclusion, because of the powerful union and governments desire to support national industry, it is still hopeful for domestic brand to turn over. While the intense competition in the handset industry will not mitigate because of excess capacity. A foreseeable industry change should be more syndicated company groups partitioned distributing channels and lots of content providers but no more profitable.
Once a tendency is affirmed, the relative competitive strategies should be changed accordingly to adapt to the current situation. Based on the abovementioned impact due to the industrial variation, the following suggestions may be adopted to optimize Nokias competitive strategies: As is mentioned above, through custom-made handsets, network operators are able to bind operations and thus press close to the market to achieve more market shares. From the developing experience of 3G handsets on the global market, it cannot be deterred that the network operators dominate the handset sale. As the no. 1 handset manufacturer in China, Nokia should make ready to take the following tactics to conform to the new industrial trend:
1Keep well guanxi with incumbent operators and pay attention to exclusive store sellers.
Since the trend of custom-made handset cannot be altered, the intelligent thing for Nokia is to keep up with the tide. So, Nokia should regulate its former distributing channels accordingly, by means of organizing new department and building special marketing force to specially deal with the tailored handsets-purchasing events from network operators. Moreover, Nokia should take initiative steps to communicate with every commerce operator and adopt active measures to cater for the different requirements of new services. For example, Nokia may take advantage of its abundant technology storage to exploit new handset functions in advance such as fluent handset-video to meet the requirements of operators. Therefore, Nokias handset may be first chosen as the mobile platform to apply innovative operation. Affirmatively, this tactic will facilitate reshaping Nokias future distributing channels in the 3G era. As the emerging power controlling the distributing channel, the exclusive store has its own growth contrail. Nothing is impossible today, and it deserves attention by Nokia. In conclusion, good guanxi between Nokia and Chinese distributing dominators accords with the Chinese market nature and will brings Nokia with advanced informationmore cooperating chances and potential market share of 3G in China.
2Nokia should spare no effort to consolidate its brand image to gain negotiating chips
Along the popularization of innovative operations via 3G network, major existing customers of 2G will gradually transform themselves into 3G users, who will correspondingly substitute 3G handsets for their 2G ones. Namely, future 3G users need current 2G clients as their potential user base. At the original period, handset exchangers mainly come from the high-end users of 2G because of the relative high price of 3G handsets. Fortunately as mentioned above, Nokia mainly targets medium and high-end customers with considerable brand royalty. According to the 2005 investigation on the handset brand royalty in Zhe Jiang (one of the most developed province in eastern China), Nokia wins the no. 1. And from the perspective of repurchase rate, the result is in turn: Nokia occupy 49.1%, Samsung 26% and Motorola 8.7%58. Believably, most of the Nokias current users will not easily change their brand selection on mobile phone as the succeeding 3G handset of same brand is introduced. Undoubtedly, network operators will also notice the vast potential customer under Nokia brand and the unbearable shift cost thereby. Thus, Nokia may negotiate with cooperating operator to retain its brand or at least develop double-logo 3G handset. Depending on its client resource, Nokia can thus avoid degrading its status as pure OEM. In a word, it is valuable for Nokia to engage in enhancing its brand image as before.
3Join the TD-SCDMA industrial league to realize mutual benefits between Nokia and Chinese local companies
Since TD-SCDMA relates to the Chinese national interest, Nokia should cherish the tenet of mutual developing and win-win to direct its management in China. That is, Nokia should keep up with the progress of TD-SCDMA in China, and try to find opportunities to join the TD-SCDMA industrial league. Thus, Nokia can gain not only technology progress jointly with other league members but also establish a friendly image of industrial cooperator. It is obvious 58 Accessed on Feb.23rd, 2007, The investigation on public-recognized handset brand in ZheJiang Province in 2005. Source: China Consuming Hotline, 27 Nov 2005. http://www.cchot.com/315/zx_text.asp?zx_id=14 that early contribution to enlarge the industrial cake will definitely return Nokia with considerably stable market share in the foreseeable future.
Depending on the deep cooperation with Chinese national industry, Nokia can hopefully really actualize its localization strategy and merge into local society. Thus, Nokia can achieve its rapid growth stemming from the future economic increase in China. In conclusion, being qualified as member of TD-SCDMA will facilitate Nokia to win the Chinese market in the long run, and therefore conform to the radical interests of Nokia.
It is believed that to be an early mover to the segment of smartphone will create competitive advantages for Nokia in the future mobile phone market in China.
References:
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