Business Analysis Mobile Phone Essay

BUSINESS ANALYSIS 09BSP025 ANDY LIM A916051 Contents Introduction4 Industry overview4 P. E. S. T. E. Analysis5 Economic5 GDP5 Figure 1: Annual GDP Growth (1)5 Figure 2: Annual GDP Growth (2)6 Household Consumption6 Figure 3: Household Consumption Growth6 Figure 4: Contributions to Household Consumption Growth7 DPI7 Unemployment8 Figure 6: UK’s Unemployment Rate8 Replacement Cycles9 SIM-only Deals9 Social10 Internet10 Table 1: Mobile Content Consumption10 Information society11 Fashion11 Age11 Broadband12 Bundling Mobile12

Seasonal effect12 Technological drivers13 Table 2: Development of mobile phone13 Convergence13 Software14 Battery14 Political16 Health16 Crime16 Environmental17 Reduction of Hazardous Substances17 Graph 1: Breakdown of Materials Used in a Typical Mobile Phone, by Volume17 Universal Cell Phone Chargers18 Porter’s 5 Forces Analysis20 Degree of rivalry20 Bargaining Power of Suppliers22 Table 3: List of principal components22 Buyers Power25 Power of New Entrants27 Threat of Substitutes30 Conclusion31 References33 Introduction

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The purpose of this report is to analyse the mobile handset manufacturer industry in the UK. The reason why I choose to analyse this particular industry is because mobile handset industry has experience significant growth over the recent years. Mobile handset manufacturers are innovating faster than ever, resulting in more and more high value and sophisticated handsets being produced. Despite the recession, there are reports showing positive growth within the mobile handset industry. This has led to my interest in analysing further into the industry.

The companies that will be analysed will mainly constitute by the leading players in the industry, such as Nokia, Samsung, LG Electronics, Sony Ericsson, Samsung, Apple, and Research-in-Motion. This report consists of two main analyses, which are P. E. S. T. E. Analysis and Porter’s 5 Forces Analysis. P. E. S. T. E. represents Political, Economical, Social, Technological, and Environmental factors, while Porter’s 5 Forces analysis will be based on Intensity of Rivalry, Bargaining Power of Suppliers, Bargaining Power of Buyers, Threat of New Entrants, and Threat of Substitutes.

Industry overview The mobile handset industry has seen significant growth over the last decade and has benefited from further robust growth in recent years. The global handset market has more than doubled in six short years, reaching 974. 7 million handset volume sales in 2006 (McQueen, 2008). In 2003, the mobile phone industry contributed ? 22 billion to UK GDP, which is 2. 2% of the UK’s total economic output (o2, 2004). Technological innovation in mobile handset industry has led the industry into a change in nature of mobile handsets.

Other than communication, mobile handset today provides more features such as internet browsing, music players, built-in cameras, video recorder, and more. Furthermore, the mobile handset industry is highly competitive. P. E. S. T. E. Analysis Economic GDP UK’s economy has been declining since 2006. Due to the recession, UK’s GDP growth has declined dramatically in 2008, and has fallen into negative level in 2009 (See Figure 1). According to the latest statistics (See Figure 2), the UK economy has experienced positive growth of 0. % in the final quarter of 2009, since the first quarter of 2008 where the decline trend began. Although UK’s GDP has seen a positive growth after six successive quarters of contraction, this was not sufficient to prevent an overall annual fall of 4. 9% in 2009. However, the quarter on quarter growth rate of GDP has steadily improved throughout the year. The positive growth has seen to continue as UK’s GDP has increased 0. 2% in the first quarter of 2010. Figure 1: Annual GDP Growth (1) [Source: Quarterly National Accounts] Figure 2: Annual GDP Growth (2) [Source: Quarterly National Accounts] Household Consumption

In contrast, household consumption has declined for five successive quarters between first quarter of 2008 and second quarter of 2009. Spending level was then flat in the third quarter of 2009, before experiencing a growth of 0. 4% in the final quarter of 2009 (See Figure 3). Despite the positive growth, the household consumption is still 3. 7% lower than its pre-recession level, which is before second quarter of 2008. Figure 3: Household Consumption Growth [Source: Quarterly National Accounts] Figure 4 illustrates a breakdown of household consumption growth by the main categories of spending in each quarters during 2009.

Figure 4: Contributions to Household Consumption Growth [Source: Quarterly National Accounts] According to the statistics, households spending declined by 1. 6% in the first quarter of 2009 as households tend to draw back expenditure on more discretionary items. Communications, household goods and services were included in the main categories that contributed to the significant fall in consumer spending. DPI As a result of recession, the UK PDI (Personal Disposable Income) growth has been idle in recent years. Consumer’s income growth is forecasted to recover from 2010, but at much lower levels than during the boom years.

The effect of the recession will cause consumer spending to decline and affect willingness and ability to purchase latest mobile phones. Figure 5: PDI Growth [Source : Office for National Statistics] Unemployment Many businesses in the economy rely on mobile communication. During the recession, many companies have cut down on their labour forces. This has impacted on the mobile handset market as the unemployment rate rises. Figure 6: UK’s Unemployment Rate [Source: Office for National Statistics] UK’s unemployment rate increased 0. 2% in the first quarter of 2010 and stood at 8%.

This has shown a negative sign as UK’s economy expanded in the final quarter of 2009, but employment rate is still rising. Replacement Cycles As a result of the economic slowdown and general price inflation, the replacement cycles of mobile phone in Europe could be lengthened. GSMA shows that the European mobile phone market volumes are expected to decline from 284 million units to 191 million units over the five years period from 2007 to 2012. These reductions are compounded by a decline in the ratio of handset sales to subscriber gross gains, which is from 141% in 2007 down to 123% in 2012 (GSMA, 2008).

SIM-only Deals During recent years, there have been growing interests in SIM-only contract deals, where consumers could save a considerable amount of money without the need to change new handsets. In my opinion, mobile users are likely to delay trading up into more expensive contracts until they are certain with their financial condition. Social Internet The basic need to obtain a mobile handset might expand from communication to gaining internet access. This is due to the increased internet surfing speed from smartphones, which encourages mobile users’ interest to surf the internet using mobile handset.

Smartphone is the first mobile handset to provide instant access to the internet and online information resources whenever consumers go. There is an increasing trend for mobile users to access digital content and web services from their handsets. Research finding has show a high tendency for mobile users to browse the internet when the user experience is of a sufficiently high quality (Grant et al. , 2008). For example, M:Metrics claims that 85% of Apple iPhone users browse the internet through their handsets.

Consumption of mobile content is expected to rise due to the improved content experience supported by smartphones. According to statistics, levels of content consumption are significantly higher for smartphone users than the market as a whole (Grant et al. , 2008). According to M:Metrics, 58. 2% if smartphone users access information or news via a browser, compared to 13. 1% across the overall market. Activity| Smartphone| Market| Any news or info via browser| 58. 2%| 13. 1%| Accessed web search | 37. 0%| 6. 1%| Watched mobile TV and/or video| 14. 2%| 4. 6%|

Accessed Social Networking Site or Blog| 19. 4%| 4. 2%| Listened to music on mobile phone| 27. 9%| 6. 7%| Table 1: Mobile Content Consumption [Source: Grant et al. , 2008] Information society Information society has made telecommunications increasingly more important to consumers, both in terms or business and leisure. In today’s fast moving society, consumers have less patience to wait for information desired. The capability of smartphones, which uses 3G technology, enable the transfer of desired information that is up-to-date, directly to consumer’s handset (Axelrose, 2005).

Time-starved consumers claim that smartphones improve their quality of life by allowing them to multitask whilst on-the-move (Hutton et al. , 2010). Additionally, consumers prefer a single device that could combine business and leisure to avoid carrying additional gadgets with them (Bhatt et al. , 2009). Fashion Smartphone has become a lifestyle changing device and there has been an increasing trend where fashion dictates buyer decision. Thus, this will exert pressure especially onto youngsters to purchase the newest smartphones. Age

There has been an increasing trend for young mobile users to purchase smartphones. The 25-34 age group is expected to grow by 12% in year 2003 (Mintel, 2008). They are more likely than any other segments to change or upgrade their handsets before the end of their contract (Mintel, 2007). According to Business Week (2009), the group of 16-34 years old are redefining the way mobile handsets are used as they are expected to dive the market for social networking handsets from 2. 3% to just below quarter of all phones by the end of 2012.

The group of 16-34 years old are redefining the way the mobile phones are used as they are expected to dive the market for social networking phones from 2. 3% to just below quarter of all phones by the end of 2012. Ageing population might affect the sales of new technology, in particular more advanced handsets such as smartphones (Mintel, 2010). In general, older consumers have less demand on the usage of mobile handsets and do not bode well for new technology. They are a large group and their size is growing, indicating that they cannot be ignored by handset manufacturers (Mintel, 2009). Broadband

According to Mintel’s research, two in three British households are now connected to broadband (Mintel, 2009). High penetration of broadband in the UK will help encourage greater technological sophistication, which could help manufacturers sell more advanced handsets in the longer term. Additionally, consumers will have increased knowledge in technology and are more aware of mobile handset choices and advancements due to the increased information availability (Prasenjit et al. , 2009). Bundling Mobile There has been an increasing tendency for mobile users to make their calls using mobile handsets from their home.

This is driven by the mobile tariff bundles offered by mobile network operators which reduce the call cost per minute from mobile networks. Thus, the use of mobile handsets will increase, which will slowly replace the use of fixed line handsets. Seasonal effect Seasonal effect would influence the mobile handset industry. For example, Apple has historically experienced increased in revenue in its first and fourth fiscal quarters due to the seasonal demand related to the beginning of the school year and holiday seasons at the end of the year (Apple Annual Report, 2008).

Technological drivers There has been rapid development in mobile handset industry. Traditionally, mobile handsets are used to transmit and receive voice, however a number of technology developments has enabled mobile handsets to change from ‘voice-centric’ to ‘data-centric’ devices converging mobile internet, social networking, SMS and MMS messaging, video streaming, navigation, and more (Motorola Annual Report, 2008). Table 2 shows the development of mobile handsets from year 2000. 2000| 2001| 2002| 2003| 2004| 2005|

Text, ringsSimple bitmapsSMS Push/PullSimple Web ClippingLegacy phones| Colour bitmapsSimple animationsEMSSMS Push/PullWAP pullSmartphones, PDAsGPRS trialsJ2ME, MIDPSimple location-based services| MMSxHTMLReal smartphoneReal GPRSP2PM-Commerce3G trialsMicro movies| Mobile video/audioLocation integrationVoice recognitionReal wirelessPDAsBroadband access3G networksHybrid WLAN/3GPAN| Table 2: Development of mobile phone [Source: Karjaluoto et al. , 2005] Convergence Mobile handsets are now not only for communication purpose. They are ncreasingly being converged into multi-function devices, which is one of the key developments driving technological innovation in the mobile handset market. One of the trends now is for mobile handset manufacturers to integrate more functionality, particularly with respect to internet access and integrated digital cameras (Mintel, 2008). Besides the convergence from first-generation (1G) to third-generation (3G) mobile handsets, the functions available in mobile handsets are getting increasingly sophisticated and useful (Axelrose, 2005).

In the UK, statistics showed that 41% of mobile users use the handset to take photos, which 17% play games on the handsets. Software Converged mobile handsets are based on programmable software platforms, enabling them to run applications such as email, web browsing, navigation, and more applications. On the other hand, they can also have built-in music players, mobile TV, video recorders, and other multimedia features.

Many mobile handsets are now developed into PDA-like (Personal Digital Assistant) phones with Operating System (OS), enabling the handsets to run third-party applications and software, and can simultaneously perform multiple tasks (Zevelskis, 2009). Mobile internet service has been available since 1999 as part of GSM technology. Nevertheless, only 2% of mobile users access the internet from their handsets in 2002 (Antoine, 2002). This is due to the poor display and expensive data transfer costs for accessing the internet.

However, the introduction of third-generation (3G) system has improved the data transfer speed and display quality, while reducing the data transfer costs significantly. Despite the launch of 3G system not long ago, companies had already getting into the research and development on the fourth-generation (4G) system, which could potentially speed up the current connection speed to 100Mb per second, tighter network security, and increase the quality of communication. Battery

The development of battery technology has enabled handset manufacturers to produce smaller and more powerful batteries. Most of the mobile handset manufacturers now use Lithium-Polymer batteries which allow them to be relatively small and light, and they are not restricted to the shape of the battery (Admin, 2007). As a result, mobile handsets are getting increasingly sophisticated. Increasing convergence are look to change the nature of mobile industry significantly, along with large implications for consumers. Political Health

The impact of mobile handsets to human body remains unclear. However, some scientific studies have linked the use of handsets to headaches, memory loss and cancer, while the industry claims that the handsets are definitely safe (BBC, 2002). In the Europe, the Specific Absorption Rate (SAR) limit is 2 W/kg over 10 g of tissue (Wikipedia, 2010). Crime As mobile handsets are getting more popular and fast innovation enables more and more high value smartphones to be introduced into the market, there has been an increased in phone crimes (BBC, 2003).

Thus, the intervention of government noticing the increasing in crimes focused on or around mobile handsets had had an impact on the development of manufacturers. Mobile handsets have to be less appealing to thieves by some form of internal security as some of the phone thieves are beginning to target children equipped with a mobile handset by parents or guardians for safety reasons (Axelrose, 2005). Environmental Reduction of Hazardous Substances

The energy and raw materials used to produce millions of new mobile phones and their accessories every year contributes significantly to CO2 emissions and global warming. Governmental regulations and corporate responsibility mandates have forced compliance from mobile handset manufacturers to stop the use of legally banned substances. The European Union has passed a law saying that all electronic devices had to be free of certain dangerous and toxic materials (Axelrose, 2005) and UK’s Reduction of Hazardous Substances (RoHS) regulations came into force on 1 July 2006 (RoHS, 2005).

Thus, mobile handset manufacturers are committed to produce handsets that are free of hazardous substances such as cadmium, lead, mercury and bromine. Graph 1 shows the breakdown of materials used in a typical mobile phone. Graph 1: Breakdown of Materials Used in a Typical Mobile Phone, by Volume [Source: Forum for the Future, 2006] As RoHS-compliance-related manufacturing processes are released, manufacturers must spend additional amount of time and resources to re-qualify their products and notifying customers of any changes made (Newell, 2006).

According to ABI’s study, the added costs of going green had impacted vendors heavily. Although the number of mobile phones being produced and discarded every year is higher than ever before, most vendors still find that the addition of an entire green product line is not economically viable for them. To achieve economic of scale and be profitable, manufacturers need to produce a large manufacturing scale which is yet to be achieved by many vendors in the industry. The added costs of going green are too much to handle for most vendors, says ABI’s study.

Although the volume of mobile phones being produced and discarded each year is higher than ever before, most vendors still find that adding an entire green product line is not economically viable for them. To achieve financially profitable and environmentally phones, providers need a large manufacturing scale that is not yet achieved by many vendors. As a result, handset manufacturers were under pressure to create a “greener” manufacturing process and to reduce the environmental footprint of their products by making them recyclable and biodegradable (Prashant, 2008). This has led mobile phone manufacturers into an awkward position.

This is because handset manufacturers could not stop selling their products to the European market, nevertheless they could not afford to develop handsets that are specifically designed for the European market (Green, 2007). So mobile phones makers are forced to make all of their nearly 2 billion new phone a year comply with the toughest environmental regulations in the world. In the EU, all mobile phone companies are obligated to set up take-back and recycle programs for batteries and phones under the bloc’s Waste Electrical and Electronic Equipment directive that entered into force in 2005.

Universal Cell Phone Chargers Recently, the GSMC trade association has announced that it has brokered a deal with the world’s leading handset manufacturers to produce a for charging mobile handsets[46]. All leading industry players (17 in total) agreed to use Micro USB as the common universal charging interface with an implementation date of 2012. This will reduce the greenhouse gases emitted during the manufacturing process and reduces waste in landfills. Porter’s 5 Forces Analysis Degree of rivalry

The competition in the mobile handset industry is highly intensive, with companies competing with each other mainly on the basis of the product, service, user experience, design, pricing, technical performance, quality, distribution, customer support, operational and manufacturing efficiency, branding, marketing and relationship with key customers and suppliers (Motorola Annual Report, 2008). Furthermore, corporate stakes are high for companies due to the requirement of huge capital investments into the business (Prasenjit et al. , 2009).

Mobile handset industry caters to a broad range of consumers, ranging from companies specializing in lower price models with basic features, and others in higher-end, advanced technology phone designs. The major players in the market are Nokia, Samsung, LG Electronics, Sony-Ericsson, Research-In-Motion, and in recent years, Apple, by gaining huge market share with the introduction of iPhone. The high-end consumer segment has been filled by Apple’s iPhone and Reseach-In-Motion’s BlackBerry. On the other hand, Nokia, Samsung, Sony-Ericsson, and LG Electronics compete for consumers in the market for a top-tier mobile handset (Hyder et al. 2008) End consumers are exposed to certain switching costs associated with starting a new handset contract or upgrading their existing contract with the mobile network operators. However, these costs are not relatively high (MacKinnon, 2008), and competitors within the industry may have included these costs into their pricing strategy, leaving high competition in the market. For example, Motorola has recently planned to spin-off its handset division in 2009, which is likely to generate opportunities for competitors to gain market share.

Since Motorola has had a number of high-end consumers, this provide a high chance for competitors to compete as many of these consumers have enough disposable income to afford high-end products, such as smartphones (Data Monitor, 2008). There are several factors that could influence the level of price competition within this industry. Since there are many sellers within the broad smartphone market, it is essential for companies to keep prices in line with substitute products, and continuously innovate in design and functionality (Data Monitor, 2008).

It is also necessary for companies to invest in sales and marketing forces, as well as advertising to establish prominent brand recognition if they want to remain positioned as the industry leader. For example, companies like Nokia have streamlined manufacturing to cut costs, therefore allowing them to compete more on price (Hyder et al. , 2008). Handsets are becoming more sophisticated and incorporating more features that are outside the core competencies of traditional manufacturers (Prasenjit et al. , 2009).

Thus, traditional competitors are increasingly faced with new competition from related industries, such as internet based product and service providers, some of which have more experience and a stronger market presence in certain segment (Nokia Annual Report, 2008). The leading players in this industry, along with peripheral mobile phone manufacturers, now compete intensely for business on both price and quality (Hyder et al. , 2008). Along with the development on mobile handsets integrated with Operating System (OS), the software and OS development will be a huge challenge.

The intensity of the industry has increased as the market will not only be competed by mobile handset manufacturers (hardware), but will also be competing with software companies such as Microsoft, Palm and Symbian. This will generate more and more new product and ideas. According researchers, the mobile handset market has reached its saturation point whereby each person in the UK have average 1. 8 handsets (Gray, 2008). However, the smartphone segments are growing (Maravedis Inc. , 2006) and companies try to gain market share in the smartphone segment. Overall, the degree of rivalry in this industry is highly competitive.

Bargaining Power of Suppliers The mobile handset industry relies heavily on the performance and development of electronic components for a variety of technological products. There are principal supply requirements for the manufacturing of mobile handsets, such as electronic components, mechanical components, software, applications and content, all of which have a wide range of applications in the handsets (Nokia Annual Report, 2008). Table 3 shows the list of principal components required. Electronic components| Chipsets, Integrated circuits, Microprocessors, Standard components, Printed wiring boards, Sensors, Memory evices, Cameras, Audio components, Displays, Batteries and chargers| Mechanical components| Covers, Connectors, Key mats, Antennas and mechanisms| Software, applications and content| Third-party software, applications and content such as: Internet access, various means of messaging, media, music, entertainment, navigation, location-based and other services| Table 3: List of principal components [Source: Nokia Annual Report, 2008] Since some of the key components are highly specialized, handset manufacturers are dependent upon suppliers for quality materials (Data Monitor, 2008).

Although most components essential to the manufacturing process are generally available from multiple sources, certain key components such as microprocessors, are obtained from a limited number of suppliers (Apple Annual Report, 2008). Thus, switching costs will be low for non-critical components, but high for critical components (Prasenjit et al. , 2009). For example, certain suppliers own key patents on widely adopted technologies, such as Qualcomm, which tied manufacturers to these suppliers (Grant et al. , 2008).

Due to the limitation of suppliers, the availability of materials and components required by handset manufacturers are relatively dependable (Zevelskis, 2009). The limitation continues to rise as some handset manufacturers are changing their management strategy to outsource activities for key components, which will increase their dependence on third-party suppliers. Furthermore, revenue generated by servicing the mobile handset industry is relatively small percentage for suppliers because suppliers also provide materials for various industries (Data Monitor, 2008).

Hence, suppliers are in the position to influence contracts, as the mobile phone industry does not hold significant figure in their total revenues (Lubeck et al. , 2008). Possible consolidation between suppliers may result in larger suppliers with stronger bargaining power. This will limit the choice of alternative suppliers, which could lead to higher cost, or limit the availability of components that could affect handset manufacturers’ performance (Nokia Annual Report, 2008).

Additionally, dependence on limited number of suppliers that require purchases in their home country foreign currency increases manufacturers’ exposure to fluctuations in exchange rate may increase cost of materials, which could not be passed on to their customers. There are certain factors that could adversely affect manufacturers such as rising energy and oil prices, which directly affect manufacturing and shipping costs. However, these factors are market-determined and will affect the industry as a whole, which should be an equally concerning issue to all the competitors in the industry (Hyder et al. 2008). As a result, handset manufacturers’ performances are subject to significant supply and pricing risks. These enable suppliers to pose more control over prices of goods sold to manufacturers. Suppliers will adjust pricing and quality to make their products more attractive so competition is high leaving them in a low supplier power position (Iyer, 2008). Conversely, the bargaining power of suppliers may be reduced as many manufacturers have the experience and expertise to manufacture components for the mobile phones (Axelrose, 2005).

Some handset manufacturers, such as Apple, Nokia, and Research-In-Motion build their own operating system and applications. This provides an advantage, since these companies do not rely solely rely on suppliers to maintain high levels of quality, thus resulting lower suppliers threat to them (Bhatt et al. , 2009). In contrast, the semiconductor industry has become fragmented as South-Asian manufacturers are beginning to enter the market, resulting in more choices of suppliers (Grant et al. , 2008). Besides, the popularity of mobile phones causes the industry to become an important and rewarding industry.

Since large quantity of handsets will be produced, this will enable high value contracts for the supply of reliable components (Axelrose, 2005). Prices of inputs are fairly stable and competitive in this industry, which reduces suppliers’ power (Hyder, 2008). Overall, I would think that suppliers hold strong bargaining power over handset manufacturers. Buyers Power In handsets market, network operators and independent retailers are the most frequent buyers of mobile handsets (Lubeck et al. , 2008). End users do not purchase handsets directly from handset manufacturers.

Instead, service providers purchase handsets in bulk from handset manufacturers and then resold to the end customer. At present, there are two main types of mobile phone package offered in the UK, which are standard contract and pay-as-you-go packages. Due to the large volume of purchases from mobile network operators and their business strategy, certain mobile network operators require mobile handsets to be customized to their specifications with preferred features, functionalities, or design and co-branding with the mobile network operator’s brand (Nokia Annual Report, 2008).

As mobile network operators are relatively concentrated, service providers hold strong bargaining power relative to manufacturers (Prasenjit et al. , 2009). Furthermore, mobile handset industry relies on a limited number of business-to-business customers and multi-year contracts from large customers such as network operators. Thus, handset manufacturers hold lower bargaining power as buyers may negotiate favourable financial conditions or extend payment terms (Zevelskis, 2009). These indicate that the level of buyers’ power is relatively high in this industry.

In the case of the recent recession, consumers have higher price sensitivity and demand on buying new mobile handsets has reduced significantly (Asif, 2009). Mobile network operators, such as o2 have introduced SIM-only deals for the end consumers in respect of the economic recession. According to Mintel’s (2010) report, there has been a growing interest in consumers opting for SIM-only deals are increasing where consumers are negotiating for cheaper deals with network operators without the need to change new mobile handsets.

This implies that manufacturers will be affected by the marketing strategies of the mobile operators, resulting in lower bargaining power. Mobile phones are a desired commodity and the buyer population is so strong. According to statistics, mobile phone owner now has an average of 1. 8 handsets (Gray, 2008), and the number is expected to grow further. This means that the market is saturated, and there are limited number of new people to come into the market (Axelrose, 2005). Moreover, elastic demand exists in the market as mobile phones, such as smartphones are not a necessary product.

There are also many brands of mobile handsets to choose from the market and consumers tend to research the capabilities of mobile handsets due to price and high reliance on the product. Switching costs are low as well since there are limited incentives for users to switch phone companies and the limitation in product differentiation (Ko et al. , 2009). Although the performance of handset manufacturers are sometimes limited by mobile network providers, handset manufacturers can extract some of the buyer power by innovating cutting-edge devices that meet, or preferably go beyond, consumer expectations (Hyder et al. , 2008).

Manufacturers will have more bargaining power over mobile network operators if they have top-selling products in the market, since the success of mobile network operators is closely linked to the popularity of mobile handsets (Lubeck et al. , 2008). Additionally, companies with strong brand name have the capability to bargain with the mobile network operators (Ko et al. , 2009). For example, mobile network operators tend to compete with each other to obtain the right to sell popular devices on an exclusive basis, such as o2 and Apple’s iPhone, or the right to launch it first, such as Vodafone and Nokia N95 (Grant et al. 2008]. For these entities, it is necessary to carry the latest fashions in mobile device technology so as to create the most value for end users (Data Monitor, 2008). Overall, handset manufacturers hold weak bargaining power relative to their buyers. However, the buying power of mobile network operators may be limited as long as the demand from end consumers remains robust (MacKinnon et al. , 2008). Power of New Entrants One of the main entry barriers into the mobile handset manufacturing industry is the huge capital requirements.

Manufacturing mobile handsets require a high level of capital investment, and this sizable fixed cost may prevent potential entrants into the industry (Hyder et al. , 2008). For new companies interested in entering the industry, the cost of capital is extremely prohibitive as large amount of capital investments are needed to establish research, development and production capabilities (Data Monitor, 2008). Activities such as technology development and essential advertising to make consumers aware of the products, all of which would need to be well supported and requires large capital commitments (Prasenjit et al. 2009). Furthermore, investment in patent protection can also delay the start-up of companies in this industry. Economies of scale within the mobile industry exist in distribution and manufacturing (Hyder et al. , 2008). High fixed costs mean that volume is essential for companies to be profitable and existing competitors have the financial clout to deter new extrants (Prasenjit et al. , 2009). Due to the considerable investments to be made for setting up this industry, the threat of new entrants into the mobile handset industry is relatively low.

However, there is exception for companies that have been operating in the relevant business, where the barriers to entry are lowered. Moreover, once new entrants have developed in the market, their products and services can be distributed broadly and quickly at a relatively low cost (Nokia Annual Report, 2008). For example, Apple is an electronics company that has expanded its product lines into the mobile phone industry by introducing iPhone to the market. Apple’s success is credited to its ability to produce an innovative product at an acceptable cost, which could not be achieved by a start-up company (Lubeck et al. , 2008).

Mobile network operators may also poses threats as they can supply their own customized, operator-specific handsets. Another entry barrier is related to brand identity. There is a close relationship in establishing a leading brand name as well as maintaining relationships with buyers in the mobile handset industry. Most of the top mobile network operators only sell products from leading handset manufacturers, and these service providers will advertise handsets according to the level of consumers demand (Hyder et al, 2008). Additionally, powerful brand identities are developed through advertising and product excellence (Prasenjit et al. 2009). A new brand would not hold the same reputation and confidence compare to existing players that have established whilst developing products over the years. Thus, new companies would need to invest significant resources on advertising and marketing to establish brand recognition in the mobile handset market. In today’s highly technical mobile communications market, end consumers are conscious about brand identity when considering to purchase a mobile phone, hence it is crucial to build a strong, trusted and proven brand name in the market (MacKinnon et al. 2008). However, it would be costly to establish a well-known brand image, and this serves as another barrier for potential entrants (Hyder et al, 2008). One of the most significant entry barriers is to establish business relationships with mobile network operators. Network operators, such as Orange, T-mobile, and o2, generate significant revenue for handset manufacturers. In this case, new companies may face difficulty in convincing mobile network operators to sell their products.

This is because new companies do not hold strong position in the market and if they cannot differentiate themselves from competing products, consumers will have less interest in purchasing their products, thus risking the buyer relationship between existing players and mobile network operators (MacKinnon et al. , 2008) and may break customer loyalty of current companies. Furthermore, new entrants may have difficulty in access to key components as suppliers work closely with existing companies, therefore some key components may only be available at a premium, which increases the costs of new entrants (Prasenjit et al. , 2009).

It is possible for new entrants to enter the market without establishing relationship with mobile network providers, where new entrants could sell directly to the end consumer and compete on price to gain market share (MacKinnon et al. , 2008). However, the likelihood of success is relatively small as handset prices are often a small component of the consumer’s total mobile phone cost after factoring in monthly airtime charges. Moreover, mobile network providers often subsidize the costs of handsets to gain market share. Nevertheless, it appears that the alternative way to enter the handset market is by offering a superior product.

An example would be demonstrated by Apple when it successfully entered the handset market, targeting high-end consumer with its innovative iPhone in 2007. By leveraging its competitive product and brand recognition in the market, Apple has negotiated a high-revenue deal from o2 in exchange for a three year exclusive partnership (MacKinnon et al. , 2008). Besides, smaller companies should consider the threat of patent infringement lawsuit (MacKinnon et al. , 2008). In this industry, many technology and product designs are protected by patents (Prasenjit et al. , 2009).

Thus, this may limit the opportunities for other companies to enter the mobile handset market. As a result, significant entry barriers exist in the mobile phone industry, mainly due to the significant capital investment requirements, economies of scale, access to key inputs such as technological knowledge, establishing brand recognition in the industry government regulations, and relationships with large buyers and suppliers (Hyder et al. , 2008). Although initial entry into the handset market is possible, the likelihood of success is low given the competitive nature of the industry.

Threat of Substitutes There are a number of substitutes in mobile handset industry, such as fixed line telephones, laptops, email, , pager, organizers, pen and paper, all of which have the similar functions of a mobile phone. The relatively high price in certain handsets, such as smartphones, increases the threat of substitute. This would lead to consumers looking for lower price tier multimedia and feature phones, Portable-Device-Assistant (PDA), and ultra portable 3G netbook (Zevelskis, 2009), which are able to provide the basic means of communication.

In some cases, it is cheaper to use a landline as it is cheaper and clearer. There are efforts from fixed-line providers, such as British Telecom (BT), where they began to provide more public telephones specialising in cheap rate local calls to other landlines. The likelihood of change is the calling trends, but is no additional threat to the trend of consumers owning a mobile phone is expected from this development (Axelrose, 2005). Email is in common use and efficient. However, it is not as convenient as to communicate with a mobile phone.

In addition, the 3G mobile phone will enable mobile internet connection, which provides users the ability to use email while on the move. However, the threat from substitutes in the mobile devices industry is relatively low as mobile handsets integrate a multitude of services, which deter consumers from switching to alternative substitutes (Data Monitor, 2008). It is likely that the trend for consumers owning a mobile phone is not going to be affected by substitutes, but the usage of handsets could be affected in certain circumstances. Conclusion

The mobile handset industry has been affected by the economic recession. Consumers are reluctant to purchase new mobile handsets until they are more certain with their financial situation. Technological advances in this industry have led mobile handsets to converge into multi-featured devices. Investment in research and development is essential in order for companies to maintain or strengthen their positions in the market. In social trends, consumers are increasingly using their mobile handsets to surf the internet to obtain information or news.

This could drive the interest of consumers into the smartphone segment. However, it is reasonable that older group of consumers could not keep up with the pace of handsets development. This may result in relatively large revenue loss as the group is quite large. Political and environmental issues do not affect the industry much, as long as handset manufacturers keep in line with the rules imposed by the government. In terms of the results obtained after using the Porter’s 5 Forces analysis, the mobile handset industry is highly competitive.

Traditional manufacturers also face competitions from companies in related industries. Therefore, competition is intense within the industry. Mobile handset manufacturers do not hold strong bargaining power neither against buyers nor suppliers. This is due to the limited supplies of certain key components and the large purchasing power of the buyers. Entry barriers are relatively high in this industry, except for companies that have been operating in the relevant business. High capital investments are required for maintaining the operation of the company.

Threat of substitutes is low, as there are no direct substitutes for mobile handsets, especially for converged handsets which integrate multiple features in a single device. As a whole, I personally think that the mobile handset industry is unattractive due to the low bargaining power of handset manufacturers, high costs involved, and severe competition within the industry. Mobile handset manufacturers are subject to significant pricing and supply shortage risks. Intense competition and rapid innovation cause mobile handset manufacturers unable to maintain industry leading expertise.

However, the future of the mobile handset industry is still bright due to the rapidly evolving spectrum of hardware and software technologies, which could turn mobile phones to replace the usage of certain electronic devices, such as MP3 players, video players, game consoles, and more. References 1) Admin. (2007). http://www. ukphoneshop. com/news/general-interest/the-history-and-the-development-of-mobile-phones-mobile-phone-networks-and-mobile-ph/829/ (Accessed on 6/5/2010) 2) Anderson, J. L. , Jonsson, M. E. (2005). The Mobile Handset Industry in Transition 3) Antoine, P. (2002).

Technical Paper: Understanding the Mobile Phone Market Drivers, http://www1. alcatel-lucent. com 4) Apple Annual Report (2008). http://www. apple. com (Accessed on 4/5/2010) 5) Asif, W. (2009). http://www. scribd. com/doc/23549554/Nokia-Strategic-Management (Accessed on 8/5/2010) 6) Axelrose. (2005). http://www. echeat. com/essay. php? t=27570 (Accessed on 5/5/2010) 7) BBC. (2002). http://news. bbc. co. uk/1/hi/health/314363. stm (Accessed on 25/4/2010) 8) BBC. (2003). http://news. bbc. co. uk/1/hi/uk/3326171. stm (Accessed on 25/4/2010) 9) Bhatt, A. , Sharma, P. , Kumar, A. , Oougunsuyi, O. , Panchal, V. , Putti, A. (2009)


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