REPORT: DISCUSSION OF STRATEGIC ACTIONS REQUIRED FOR HTC CORP.

LIST OF CONTENTS

1. Introduction 2. Historical strategy of HTC 3. Current strategy of HTC 4. Appropriateness of strategic choice 1. Consistency 2. Consonance 3. Advantage 4. Financial analysis and business risk analysis 5. Corporate Strategy 6. Conclusion and recommendations 6 7 7 3 4 5 5 6 6

Appendices: A: International value chain for HTC Corp. B: Strategic evaluation of HTC using the tests of Johnson and Scholes 10 C: Smartphone industry analysis using Porters five forces 12 9

List of References

14

1.

Introduction

HTC Corporation was founded in 1997 and progressed, by 2009, to become the worlds leading manufacturer of smartphones which run Microsofts Windows Mobile operating system (Yoffie and Kim, 2009). The company operated in two segments being the original design manufacturer (ODM), manufacturing smartphones for branded handset companies and its mobile phone operator business, designing phones for service providers. In 2006, HTC embarked upon branding phones under its own label which was seen as a risky step by stakeholders. Despite prevailing challenges the CEO, Peter Chou, was optimistic (Yoffie and Kim, 2009).

The discussion entails strategic actions required to achieve the goal of HTC Corp. to become the worlds leading smartphone company in the world. An analysis of resources, strategic capability, the environment and assessing stakeholders will be undertaken, as well as choosing a strategy by identifying, selecting options, as indicated in Boojihawon and Segal-Horn (2006).

2.

Historical strategy of HTC

The companys initial focus on laptops, diversified into handheld devices. HTC employed a competitive strategy to differentiate itself through offering mobile phone operators customized phones which initially provided better returns than the ODM business (Yoffie and Kim, 2009). Costs for research and development to create innovative products did indeed increase unit costs. As HTC expanded the business through further contracts from other geographic locations and a collaborative learning joint venture with Handspring, the company showed no significant financial stress. At this point in 2005, HTC was satisfied with the rapid growth and performance of the company and its associated strategy of broad differentiation, as per Porters generic strategies framework cited in Viney and Gleadle (2007). In addition, HTCs competitive scope was broad and may be viewed as competing globally and across all market segments. At this stage, HTC was not a significant competitor in the mobile phone industry. This is evidenced with the CEO stating, in 2005, that, We do not plan to be like Nokia or Motorola. We try to avoid (competing) with them (Yoffie and Kim, 2009: 4). HTC was specializing at a specific level of the value chain employing a horizontal approach.

The phone industry, being dynamic, predicted the growth of smartphones to comprise a third of the worlds mobile phone market by 2013 which reinforced the need to review the strategy of HTC (Yoffie and Kim, 2009).

3.

Current strategy of HTC

The CEO, questioned where HTC would partake in the expanding value chain of phone software and the subsequent actions necessary to enable HTC to be unique in such a dynamic sector (Yoffie and Kim, 2009). He realized that international growth would be limiting if differentiation into branding did not occur. This new strategy was disconcerting to investors, thereby reducing shares by half of its earlier value. In addition, previous attempts by various other companies proved detrimental to their respective companies.

Various competitors in the mobile phone industry, such as Nokia, maintained cost advantages and economies of scale in component prices (Yoffie and Kim, 2009). HTC initiated its brand strategy in 2007 in Europe and Asia, in which it had acquired Dopod, which was well established in Asia. HTC then penetrated the Chinese market, however due to barriers to entry into the Unites States (US) market, challenges were encountered. HTCs broad differentiation strategy thus became more focused upon the high end of the consumer market, being both professionals and consumers.

HTC invested greatly in research and development to create further product innovation. The subsequent differentiation and innovation strategy indeed created a shift in the industry structure as mentioned in Viney and Gleadle (2007).

In 2006, HTC collaborated with Google search engine to create a handset to work on Android (Yoffie and Kim, 2009). This lead to reduced license fees thereby lowering overall costs to the company. In 2007, nearing the launch of their touch screen interface smartphone, Apple revealed its intention to launch a similar product, which inadvertently created opportunities by familiarizing the consumer with the product. The success of this product provided a boost to the decision of HTC to exit the ODM business by the end of 2009. The company has thus focused upon market penetration through the development of a successful product and directed its resources in one chosen competitive area as cited by Pearce and Robinson in Viney and Gleadle (2007)

HTCs strategy of diversification evolved into an organic strategy, exploiting the existing product and markets as per Ansoff cited in Viney and Gleadle (2007). The company sought to expand into the Chinese and US markets which were part of the global market penetration strategy (Yoffie and Kim, 2009). Furthermore, issues of economies of scale in unit pricing proved challenging. Overall costs were reduced by moving part of the value chain, manufacturing, to China, resulting in the configuration of the value chain becoming international. In seeking overall production scale efficiency, all is directed at scale operations (Segal-Horn, 2006). However, for the company to become most efficient there had to be significant relationships amongst all activities, including design, product, logistics, marketing and sales/service. Appendix A displays the existing and a proposed value chain.

Furthermore, efforts to control costs meant less customization as per the original approach (Yoffie and Kim, 2009).

The choice of increased globalization of the company in marketing its own brand was primarily ignited by technological developments in the industry as well as deregulation, in partnering with Google, through reduced licensing payments to Microsoft (Yoffie and Kim, 2009). Strong international competitors such as Nokia initially deterred the organization from competing on a global scale.

4.

Appropriateness of strategic choices

The strategic choices of the organization will be evaluated against the tests of suitability, feasibility, and acceptability of Johnson and Scholes as per Appendix B, the Rumelts tests of consistency, consonance, advantage, feasibility as per Viney and Gleadle (2007). Business risks will also be identified.

4.1

Consistency

HTCs proposed strategy to be the leading smartphone company in the world is clearly inconsistent with its high-end target market. Failure to re-focus and differentiate the product to reduce unit costs through scale economies could prove detrimental to HTC, an arena in which competitors such as Nokia retain the advantage (Yoffie and Kim, 2009).

4.2

Consonance

The key strategy of innovation and emergent technology is an indication of the creation of social value, as mentioned by Rumelt, cited in Viney and Gleadle (2006). The organization has an extensive research and development component striving to provide more innovative products to effectively meet the demand of consumers in a technologically dynamic industry.

4.3

Advantage

HTC is able to maintain the value it creates, superior skills and resources, which Rumelt, cited in Viney and Gleadle (2006) indicates competitive advantage, together with a superior position. HTC is striving towards improving their position through the branding initiative (Yoffie and Kim, 2009). However, geographic positioning of the organization and sufficient market penetration into US markets is lacking in the strategy.

4.4

Financial analysis and business risk analysis

An analysis of financial ratios will be conducted as per Parkinson (2003).

A current ratio analysis was conducted for 2008 (1.86:1), 2007 (2.42:1) and 2006 (0:1). This reveals that cash was unavailable in 2006 to cover liabilities. However, subsequent growth in 2007-2008 adequately covers liabilities.

The debt ratio indicates the level of financial leverage between 2004 and 2008, changing from 50% to 35% in 2006 and steadily increasing to 47% in 2008 as per HTC cited in Yoffie and Kim, 2009.

Implications of the changes in HTCs strategy in 2006 lowered the utilization of borrowed money, which steadily increased by 2008. HTC may be at risk of bankruptcy if unable to repay debt and may also be unable to find new lenders in the future. Furthermore, this has increased the shareholders' return on their investment as indicated in basic earnings per share progressively rising from 2004 to 2008 from 0.17 to 1.16. The gross margin has gradually increased, declining slightly in 2008. Of concern is the return on sales declining from 24% in 2007 to 19% in 2008, suggesting that HTC has not recovered from the strategic changes instituted.

A Sensitivity analysis may reveal the effect of exchange rates and the global economic recession on outcomes.

The attractiveness of the company to shareholders was displayed in the change in strategy to create its own brand. Shareholders, considered risks involved as being ultimately detrimental to the company, thus reducing shares to 50% of its earlier value in 2006/07 (Yoffie and Kim, 2009). Share prices subsequently rose, stabilized and dropped during the economic recessions of 2009.

A cost benefit analysis considers a greater group of stakeholders including environmental activists who may be concerned with the effects of manufacturing and insufficient recycling associated with the product. In reducing costs by moving manufacturing to China, one may consider that impact to the environment was not considered.

5.

Corporate Strategy

Diversification is a key element in corporate strategy (Viney and Gleadle, 2006) and highlights a move away from a single industry and a relationship with other organizations, which HTC has indeed accomplished with Google.

6.

Conclusion and recommendations

Lack of economies of scale in unit production proved challenging for HTC. The move of part of the value chain to China, reduced overall costs to the company. However, due to the target market being the high-end smartphone products, the company needs to review cost production and further reduce costs in light of the economic recession. To become more competitive the company would need to consider subsidiaries in other countries and further integration. From being an international organization, HTC would need to consider becoming transnational. As per Bartlett and Ghoshal cited in Segal-Horn (2006), assets and capabilities would be dispersed and interdependent, overseas subsidiaries would be differentiated and national units integrated with worldwide operations to suit the relevant markets. In addition, knowledge could be developed and jointly shared. Please refer to Appendix A as per previous discussion. As per Ghoshals organizing framework cited in Segal-Horn (2006), to effectively compete in the worldwide market, HTC must expand and exploit potential scale economies in each activity, balance

scale with strategic operational and strategic flexibility and benefit from experience by innovation and reducing costs. If the prediction of eMarketer cited in Yoffie and Kim (2009) is correct, by 2013 smartphones would represent more than a third of the worlds mobile phone market and by 2012 mobile internet penetration would be 30%. Consequently, HTC will need to penetrate a broad consumer market and simultaneously create further partnerships in order to sustain its advantage over competing smartphone manufacturers, through the current successful association with Google. One of the core competence areas is the users experience, which reveals an 80% customer satisfaction rating of HTC products. An industry analysis (Appendix C) reveals a lack of differentiation in the industry for price with customer preference being functionality (Mcafee, 2009). As brand name is a major deciding factor, HTC has to continue to market the brand. As the industry supports multiple firms due to the ability to differentiate between business and casual users, but does not support a large number of smaller firms, the industry is very rivalrous as competitors wrestle to become one of these few firms. Consequently, HTC needs to differentiate into the casual user market and reduce unit costs, expand through partnerships and continue to be innovative to secure itself as the leading smartphone company in the world.

APPENDIX A

International Value chain for HTC Corp (adapted from Segal-Horn, 2006)

Existing Value Chain

Proposed Value Chain [pic]

APPENDIX B

Strategic evaluation of HTC using the tests of Johnson and Scholes

4.1.

Suitability

The new strategy proposed by the CEO of HTC chiefly focused on branding and marketing handsets under its own name. Key success factors identified are emerging technology by investment in research and development technologies, brand marketing, skill and capability in design and innovation, efficient distribution, user support, customization to target various market segments, corporate ventures with various global operators and collaborative learning partnerships with organizations such as Handspring (Yoffie and Kim, 2009). The structure characterized by an open work environment encouraged creativity and innovation thus effectively utilizing capabilities and resources. One identified weakness is the lack of scale economies leading to higher unit pricing and potentially less customization.

4.2

Feasibility

The organization may possess the resources from investors to implement the branding strategy. It is, however, questionable that HTC will be able to fulfill the vision of being the leading smartphone company in the world. The new branding strategy caused investors to temporarily retreat (Yoffie and Kim, 2009). Nevertheless, the organization currently possesses the potential to raise sufficient capital. In addition, HTC now has to consider operational issues arising from being a brand name, such as support services, sales and marketing. Furthermore, current leverage through association with Google, has created a more effective product, which is not sustainable in the long term. Alternatively should HTC be able to reduce prices and review its target market, further competition is inevitable. The implementation of the overall strategy arising from this vision is nevertheless, arguable.

4.3

Acceptability

This criterion focuses on stakeholders perceptions of the results of the strategy according to Johnson and Scholes, cited in Viney and Gleadle, 2006. This pertains primarily to regulatory, environmental and fraud risks, profitability, ethics, reward and relationships. In accordance with these factors and attaining business objectives, HTC has steadily increased stakeholder value (Yoffie and Kim, 2009), and has effective business units to administer risks and opportunities posed by economic, social, human and environmental capitals. Stakeholders should thus be reasonably satisfied. APPENDIX C

Smartphone Industry Analysis using Porters five forces Adapted from Mcafee, 2009

Entry Barriers Numerous barriers prevent entrance into the industry. Amongst the largest are: fixed costs necessary research and development reputation of firms people purchase from companies they trust

 networking consumers purchase phones used by others switching costs switching phones and service are costly differentiation limited capability to differentiate from other phones

Bargaining Power Smartphone companies have relatively weak bargaining power. Certain factors include: substitutes several substitutes elastic demand smartphones are not essential products information customers research capabilities of smartphones because of price and high product reliance differentiation little differentiation from competitors switching costs few incentives to switch phone companies

Substitutes There are numerous substitutes for smartphones which are mainly used for mobile access to information. Substitute products are cellular phones, laptops, organizers or pagers. Significantly, cellular phones and laptops adequately provide the services required by the majority of consumers in terms of mobile access to information. Complements. Any application that works well with the smartphones is a complement. These include e-mail, data manipulation applications, maps and GPS, organization applications, various internet applications and essentially any software available on phones. Music and media content, computers and travel products are also complements.

Rivalry Rivalry is rife in the smartphone industry and despite a few strong competitors, the industry does not support many organisations. This is due to: Differentiation limited ability to differentiate a smartphone despite much differentiation between casual and professional users for smart phones. This permits multiple firms to exist relative to total number being small. Networking People purchase products others use Software may be less expensive service between the same phones. Software compatibility is also an advantage.

 Economy of Scale minimal scalability to create more software, not directing market to a small number of firms. Prices Customers generally value quality significantly over price when purchasing a regularly used product. Also pricing is similar and not important in comparison to the usefulness and amount of time customers will use the phone. Consequently, there is limited differentiation for price, and companies with perceived low quality and low budgets for research and development will deteriorate. Brand Name consumers wish to purchase from the popular or reliable company, hence limiting existence of multiple small firms.

As such the industry supports multiple firms due to ability to differentiate between business and casual users, but does not support a large number of smaller firms. The smart phone industry is very rivalrous as competitors fight to become one of these few firms.

LIST OF REFERENCES:

Boojihawon, D.K. and Segal-Horn, S. 2006. Strategy: strategy formulation: unit 1. Milton-Keynes: Open University.

Mcafee, 2009. Google phone positioning strategy [online]. No place of publication: no publisher Available from:

[Accessed 23 September 2010]

MTN Group. 2010. MTN Group Limited: Integrated Business Report for the year ended 31 December 2009 [online]. Fairlands: Mobile Telephone Networks Available from: [Accessed 23 August 2010]

Parkinson. A. 2003. Fundamentals of senior management: the practice of management for MBA B713: Sessions 5-6. 3rd edition. Milton-Keynes: Open University.

Segal-Horn, S. 2006. Strategy: strategy formulation: unit 7. Milton-Keynes: Open University.

Viney, H and Gleadle, P. 2007. Strategy: strategy formulation: unit 5. Milton-Keynes: Open University.

Yoffie, D.B and Kim, R. 2009. HTC Corp. in 2009. Boston: President and Fellows of Harvard College

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