Changes in the global mobile market and new challenges for LG mobile.

Park, Namgyoo K. ; Lee, Jeonghwan ; Suh, Junghyun 等

CASE DESCRIPTION

The primary subject of this case study falls within the scope of strategy. The secondary issues examined in this case study include globalization, marketing, decision-making, growth management strategy, industry structure attractiveness analysis, and understanding competitive advantage. The case has a difficulty level of four out of five, and is appropriate for the senior level. The case is designed to be taught in one hour, and is expected to require three hours of outside preparation by students.

CASE SYNOPSIS

The global mobile phone market has long maintained a double-digit growth rate, and its total sales volume has reached 1.24 billion. Today, the global market is dichotomized into developed markets and developing markets; alternative demands dominate the former, and new demands dominate the latter. The rise of smartphones is one of the hottest issues in developed markets. Recent changes in the global market landscape, initiated by the arrival of smartphones, is bringing to an end the market domination by the top five companies--Nokia, Samsung Electronics, LG Electronics, Motorola, and Sony-Ericsson. The decline of Motorola and Sony-Ericsson, and the sudden rise of smartphone specialists such as RIM, Apple, and HTC are disrupting the market structure, and causing increasing uncertainty within the wireless business.

Despite increasing market uncertainty, LG Electronics (LGE) managed to become the third-largest global mobile phone manufacturer by 2009. However, it might be too early to celebrate, as no one can guarantee the sustainability of LGE's growth in today's highly uncertain environment. Inadequate distribution channels are preventing LGE from catching up with Nokia in the developing markets, and competition in the developed markets among high-end manufacturers is becoming fiercer by the day. Moreover, LGE lacks competitive advantage in the smartphone market, which is the only market with high growth potential. LGE's smartphone manufacturing capacity falls behind that of RIM and HTC, and LGE has to depend on Microsoft and Google for the operating system software. LGE's application store (app store) is still in a nascent stage, and its growth potential is yet to be proved. In this context, this case study will lead the discussions on how LGE can survive in this challenging new environment as a late mover in the smartphone market. Besides, with the app store-a disruptive innovation that is rearranging how digital contents are distributed-expanding its territory, discussions about LGE's strategies and its future prospects will provide meaningful suggestions not only for the mobile phone industry but also for other IT industries.

INSTRUCTOR'S NOTES

INTRODUCTION

The global mobile phone market has long maintained a double-digit growth rate and its total sales volume has reached 1.24 billion. However, the market size in 2009 was projected to decrease by 3.2%. Despite the increasing market uncertainty, LG Electronics (LGE) took over the third place in the global mobile phone market in 2009. Besides, it achieved 23% of market share in North America, which marks the highest in its corporate history. Nevertheless, it is too risky to guarantee the sustainability of LGE's success in today's highly uncertain environment.

This case study will lead the discussions on how LGE can survive in this challenging new environment as a late mover in the smartphone market. This case study is intended to teach various aspects of strategic analysis, including internal and external analysis, and strategic choice as a function of SWOT analysis. In addition, this case study will provide students the opportunity to examine the dynamics of the mobile phone industry.

CASE OVERVIEW

Since companies operate on an open system, whether or not the company's strategy is appropriate depends on its environmental factors (Lawrence & Lorsch, 1967; Van de Ven & Drazin, 1985). Different outcomes are driven from corporate strategies, especially since the corporate environment changes dynamically (Zajac, Kraatz, & Bresser, 2000; Jansen, van den Bosch, & Volberda, 2006). Therefore, companies actively search for new success factors in a volatile environment, and continuously adjust their strategies. When companies implement wrong strategies, or change their strategies later than others, any advantages that they had can suddenly become disadvantages. LG Electronics (LGE) responded early to the WCDMA trend in order to avoid the difficulties it had faced as a late mover in the GSM market. Its success in the WCDMA market made LGE a noted global brand. However, LGE's strategic response to today's ever-growing smartphone market is relatively slow. Accordingly, finding the methods for LGE to secure its competitiveness in the new industry paradigm becomes important, and thus, this is one of the main issues taken up in this case study.

DISCUSSION QUESTIONS

(1) Evaluate the traditional mobile phone industry and the smartphone industry using Michael Porter's Five Forces Model.

The Five Forces Model, developed by Michael Porter, provides multiple criteria in evaluating the external environment of a firm (Porter, 1985, 1996). Comparing and analyzing the factors that influence the traditional mobile phone industry and the smartphone industry will provide an opportunity to discuss the core competencies that LGE needs to pursue in the future.

(2) Evaluate the key success factors of the application store (app store).

Many of the smartphone market players are concentrating their resources and capabilities on the app store, a contents market for smartphone users, due to its high value creation and switching cost for customers. LGE recently participated in this trend by opening its own App Store. Therefore, analyzing the core success factors of app stores in general will provide a basis for discussions on the kind of strategic decisions that should be made by LGE.

(3) Among the various strategies that LG Electronics can adopt (such as independent vertical integration, establishing partnerships based on strategic cooperation with OS and application providers, and partial integration through acquisition), which will be the optimal strategy to secure competitiveness in the smartphone market? Why or why not?

As this case study has suggested, in order to succeed in the smartphone market, competitiveness should be secured on the three axes of competition-handset, OS, and application. Further, to catch up in the smartphone market, where LGE is lagging behind, the possible strategies for consideration would be independent vertical integration of handset, OS, and application; partial integration through acquisition of OS or application providers; and establishing partnerships based on strategic cooperation with OS or application providers. After examining the pros and cons of each strategy, discuss what the best strategy will be for LGE.

ANALYSIS

(1) Evaluate the traditional mobile phone industry and the smartphone industry using Michael Porter's Five Forces Model.

Here, we evaluate the differing dynamics of the traditional mobile phone market and the smartphone market, using Michael Porter's Five Forces Model.

(A) Five Forces in the traditional mobile phone market

--Competitive rivalry within the industry (high)

Growth in the traditional handset market that maintained double digits for the past several years is now stagnating due to the slowdown of the global economy. Accordingly, the market leader Nokia and many other handset makers are trying to stabilize their financial status. Gartner forecasted that the mobile phone market would decrease in size by 3.2% in 2009. In this case, there would be excessive supply and short demand, which would make companies suffer from a surplus of manufacturing capacity and decrease in product price.

--Bargaining power of suppliers (high)

There are mobile communications service providers and contents providers in the traditional handset market. The mobile communications network is an essential infrastructure for the handset makers' products to function as a mobile phone. These communications networks are owned by a limited number of service providers. As for the contents, there are limits placed on their distribution by the mobile communications service providers due to wireless communications protocol regulation. Because of such factors, handset makers are highly dependent on service providers (Pfeffer & Salancik, 1978).

--Bargaining power of customers (high)

In many countries, handsets are distributed by communications service providers. Hence, handset makers have no direct distribution channel to sell their products. Even the contents services are provided by the service providers. Therefore, the quality of the product, loyalty of customers, and branding through advertisement are the only ways for handset makers to influence the consumers' decision-making process.

--Threat of new entrants (low)

The growth rate of the global mobile phone market is decreasing, and most of the market is shared among the Big 5 players: Nokia, Samsung, LGE, Motorola, and Sony-Ericsson. Moreover, achieving economies of scale is an important aspect of the handset manufacturing business. It is also very costly to construct global distribution channels. Thus, for potential entrants, the handset business is basically an unattractive market with high entry barriers.

--Threat of substitutes (low)

Although it lacks mobility, the personal computer (PC) overrules the mobile handset in data delivery performance, in the variety of contents, and in computing performances. Most consumers perceive the mobile phone as a communication tool and the PC as a computing performance tool. Traditional phones also function as a communication tool, but have very low mobility compared to mobile phones. Therefore, the threat of substitutes is relatively low.

(B) Five Forces analysis of the smartphone market

--Competitive rivalry within the industry (high)

There are five major players from the traditional market and smartphone specialists, such as RIM, Apple, and HTC, competing in the smartphone market. Besides, since smartphones use an operating system (OS), major PC makers like HP, Dell, and Acer are entering the smartphone market. Therefore, the competition within the smartphone market is expected to be highly intensive.

--Bargaining power of suppliers (high or low)

Currently, data transmission on smartphones is done through the Internet rather than a mobile communications network, due to the universal usage of a full browser. This trend is expected to extend to voice calls. Therefore, handset makers in the smartphone business would have to rely less on service providers. In the case of applications, the bargaining power of suppliers will be low if an app store established by a handset maker attracts many users, and provides sufficient incentives to application developers. Nonetheless, if the smartphone manufacturers are being supplied with applications from app stores of other companies, or if the competitiveness of their own app store is very low, the bargaining power of suppliers should be relatively high. Moreover, in the case of smartphones, there is a need for an exclusive OS that creates a new supplier-consumer relationship. Nokia and Apple, which have their own OS, might not be highly influenced by OS operators such as Google and Microsoft. However, LGE and Motorola, which do not have their own OS, show absolute reliance on such OS operators. Therefore, it can be concluded that the bargaining power of suppliers in the smartphone market will be different depending on the handset maker's capabilities.

--Bargaining power of customers (high or low)

In the case of the smartphone market, handset makers can approach customers through an app store without having to go through the service providers. Besides, if the app store continues to create customer value, the switching cost will increase. However, if the handset maker does not have its own app store, it can only approach customers through other app stores, which still gives them great bargaining power. Moreover, the increasing number of app stores provides more options to the customers.

--Threat of substitutes (high)

PCs with increased mobility, such as the UMPC, are set to be released. Of course, their communication performance is very weak, but such PCs allow data transmission and application downloads that outperform smartphones. A consumer who wants powerful computing performance will choose a UMPC and a mobile phone, rather than a smartphone. In other words, a PC can be a partial alternative to a smartphone. Consequently, PCs pose more threats to smartphones than they did to traditional mobile phones.

--Threat of new entrants (high)

There are high threats of new entrants in the smartphone market. The smartphone device manufacturing market has a high growth potential. Although some companies have insufficient production capacity, they can supplement it by forming partnerships, as iPhone and HTC successfully did. Moreover, there is a high possibility of OS operators with high software manufacturing skills entering the market in this way.

(C) Conclusion

As we can see from the above discussion, the relationship with the service providers determines the distribution coverage and the supply of contents of the handset manufacturers in the traditional market. Manufacturers who maintain close relationships with service providers, therefore, are the ones with access to distribution channels and contents. At the same time, strategies to increase the switching cost for consumers are limited, and only those manufacturers who make what the consumers demand can be favorably positioned. In this context, it is very important to achieve a successful platform strategy, and release various products at a reasonable price through economies of scale. Nokia's success derives from securing these success factors.

On the other hand, in the smartphone market, there are new ways for manufacturers to approach content developers and customers. Handset makers can create their own ecosystem by establishing their own app stores. If this ecology is successfully adopted, they can increase the switching cost for customers, and provide more incentives to contents developers. Therefore, establishing a successful app store is a core success factor in the smartphone market.

(2) Evaluate the key success factors of application stores

An application store (app store) that is in operation, or is planned to be in operation, is open to application developers. However, this openness differs from the customers' perspective. First, there are exclusive app stores such as Apple's, which only those customers with the company's device can access, and which is the only store for them to download applications. Second, there are app stores such as LGE's, which allows downloads from other app stores. Third, there are partially open app stores that do not allow other device users to access the applications but allow their customers to use other app stores.

It is difficult to say which form of app store is more advantageous. In the case of an app store with an exclusive format, the users have no other choice but to purchase from their app store, so the fixed demand is always present. However, if the applications do not provide differentiating values, it will be hard to attract customers. In the case of a partially or completely open format app store, it is easier to attract new users, but there is no control over the purchase choices of the users.

Therefore, it is unlikely that IBM and Apple's competition in the PC industry, distinguished by openness and exclusiveness, will recur in the app store competition. More importantly, while it would be easy to say that Apple's past failure in the PC industry was due to its exclusiveness, it would be wrong to conclude that IBM's success in the PC market was due to its openness. If openness was the mandatory factor for success, IBM had to be the winner. However, most of the success in this market went to Microsoft and Intel.

If openness is not the factor that drives success for an app store, what then is the key success factor? The success factor can be found in the consumption patterns of the applications. On the development side, individual developers can upload their application to many app stores. However, the story is different at the consumer's end. Even if there are several options in purchasing applications, the consumer will not utilize all of them. For example, a consumer who purchased an LG smartphone with Google Android through Vodafone can have access to the app stores of LG Electronics, Google, and Vodafone. However, if these app stores fail to provide differentiating aspects, the consumer will go back to the app store he/she had dealt with in the past, or to the app store with the highest number of applications.

Therefore, the most important factor in app store competition is to be a pioneer, and to keep as many developers and users occupied as possible. If one app store is established faster than those of the competitors, there will be many more new applications uploaded, and that particular app store's users can be supplied with endless innovative applications. As a result, satisfaction will be higher among existing users, and the number of new users will increase. The higher demand for the app store will consequently attract even more application developers. However, if the competitors have already engaged many users, or if the differentiating value of the focal app store does not surpass the switching cost, it will be difficult to form the virtuous cycle illustrated below.

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It is important to establish a mobile market faster than the competitors in order to form a virtuous cycle in the app store competition. The communications service providers, OS operators, and device makers will all be in the competition. The OS operators are most likely to form a virtuous cycle, since service providers have a regional limitation and smartphone manufacturers are usually late entrants in the application market. While Apple continues to maintain a closed app store platform, Google's Android has gained great popularity in the market. Apple's case shows that exclusive app stores will be advantageous to players who have already engaged many customers, or have a very attractive hardware that will attract more new customers.

(3) Among the strategies LG Electronics can take to secure competitiveness in the smartphone market (such as independent vertical integration, establishing partnerships based on strategic cooperation with OS and application providers, and partial integration through acquisition), which would be the optimal strategy? Why or why not?

The core competencies of the smartphone market can be categorized into handset manufacturing capacity, securing an independent operating system (OS), and establishing an app store. Evaluating the capability of the current smartphone manufacturers, RIM, Apple, Nokia, and SEC have these three competencies in a vertically integrated form. RIM and Apple produced smartphone handsets based on the capabilities of their own OS and app stores, to secure competitive advantage in the smartphone market. Nokia established an independent OS (Symbian) and app store (Ovi), based on its conventional handset manufacturing capacity and exclusive market status. SEC, the global number two handset manufacturer, announced its independent smartphone OS Bada toward the end of 2009, and it is operating an app store dubbed Shop-in-Shop. Taiwan's HTC is maintaining its status in the smartphone market with its handset manufacturing capacity combined with cooperation from OS providers such as Google, and the utilization of other app stores.

Currently, LGE does not have an independent OS and is running LG Apps, which is still modest in scale and development. In order to gain competitiveness in the smartphone market, where it is lagging behind, LGE will have to quickly establish the capacity for OS and applications. The strategies LGE can take to overcome this issue include vertical integration by securing an OS and app store through independent research and development, partial integration through the acquisition of OS or application providers, and establishing partnerships with OS and application providers. Let us consider the pros and cons of each strategy that LGE could select.

--Independent Vertical Integration

Independent vertical integration refers to the establishment of OS and application capacity within a company based on its handset manufacturing capacity. LGE is focused on handset manufacturing capacity through effective internal supply of various modules for mobile phones. If LGE develops new technologies such as the touchscreen, adopts an independent OS, and establishes or operates a differentiated app store at an early stage, in addition to its existing competitiveness as a handset manufacturer, it will be able to secure competitive advantage in the smartphone market through strategic positioning via differentiation, including both optimized hardware and software. However, developing an independent OS and app store will be a challenge for LGE.

The most distinct characteristic of the competition in the smartphone OS market is that there are virtually no latecomers entering the market. The traditional computer OS providers (Google, Apple, Microsoft) and the smartphone handset manufacturers who used their own independent OS (Nokia, RIM, Palm) have firmly established themselves at the center of the market. This situation seems to have occurred due to the following reasons: a substantial amount of experience is required to develop and constantly improve a stable OS; as users become accustomed to an existing OS, new entrants have to provide value that can exceed the switching cost for consumers; and economies of scale are vital in achieving price competitiveness for the OS market. Moreover, due to its low share in the smartphone market, the mandatory application of an OS produced by LGE on LG-manufactured smartphones would end up lowering the attractiveness of the handsets.

For LG Electronics, a latecomer in the app store market, it is not easy to provide values that can appeal to both content providers and users through an independent establishment. From the content providers' perspective, they can gain profits when their uploaded applications are widely used. Therefore, content providers would naturally flock to those app stores with a sizeable number of users, or those with a high possibility of attaining such numbers in the future. Moreover, the applications provided by handset manufacturers have a low utilization rate as they function only on the particular manufacturer's handset. This will become a stumbling block in commercializing their app store unless they provide differentiated value like Apple's app store. Moreover, the chances of latecomers such as LGE establishing a virtuous cycle of app store are considerably low.

--Partnership with OS and Application Providers

The partnership strategy focuses more on the current competency related to smartphone handset manufacturing, and forges active partnerships with open OS and app store providers such as Google and Microsoft, rather than investing on resources to secure competency in the OS and application market. LGE's handsets hold a strong premium image, and have a high consumer satisfaction rating. Moreover, it can be internally supplied with the necessary modules for manufacturing smartphone handsets in an effective manner. As smartphones become more sophisticated and increasingly resemble the architecture of a PC, the knowledge and capacity accumulated in the PC industry will also contribute to enhancing LGE's competitiveness.

Currently, Google and Microsoft have developed powerful operating systems with the aim of holding Apple in check, and these operating systems are rapidly spreading in the market. Deciding on strategic cooperation at an early stage to establish strong partnerships would serve to bring favorable results. In the case of app stores, handset manufacturers and mobile service carriers who are losing influence in the mobile communications market are aiming to establish an integrated app store through partnerships. As LGE has a mobile service carrier among its subsidiaries, establishing a powerful app store through a partnership with the service carrier would be preferable, rather than establishing an app store independently. Moreover, it is important to actively adopt other app stores. This strategy is expected to achieve operational efficiency and early release of products by forming economies of scale based on LGE's strategic cooperation between its handset production, OS, and app store. However, by sharing the two critical factors of the smartphone market, namely, OS and app store, LGE might face difficulties in securing competitiveness and expanding its market share if it fails to differentiate its products.

--Partial Integration through Acquisition

This strategy refers to a partial integration by acquiring OS or application providers. It is not an easy task to secure an independent OS and an efficient app store internally. If external acquisition allows the OS and app store to be transferred to a manufacturer, it would be possible to establish core competencies at an early stage, not only for handsets, but also for the OS and the app store. Moreover, the cost and time needed for the internal development of an OS can be reduced, while users can obtain various applications. When product differentiation based on partial integration through acquisition and strategic cooperation with external parties is realized, competitiveness in the smartphone market could be secured early. However, this strategy cannot be solely implemented by LGE. It is only possible when the OS and application providers are brought to the market for sale. Currently, the OS and application providers in the market are equipped with strong competitiveness, and there is little chance that they will be offered in the market. In other words, this strategy does not appear to be possible to implement.

All of the strategies that LGE could take to secure competitiveness in the smartphone market have their own strengths and weaknesses. For LGE to secure competitiveness early in this rapidly growing competitive market, establishing partnerships with OS and application providers based on strategic cooperation holds the highest possibility for realizing success. Although this strategy is similar to that of HTC, it must be implemented with differentiation. Product differentiation, a critical factor in the growing stage of the market, is crucial for success in the smartphone market. LGE should actively appeal to consumers by differentiating and providing competitive advantage to its products by securing competitiveness in its weak sectors (OS and application) through active partnerships, and by securing leadership in its specialized sector, namely, handset manufacturing.

Namgyoo K. Park, Seoul National University

Jeonghwan Lee, Seoul National University

Junghyun Suh, New York University

Hyojung Kim, Sangmyung University