International Business Strategy - ESPEME 2010/1011 Professor Bill Houston Group Assignment

The Consumer Electronics Industry Analysis

Submitted by: Catarina Medeiros Wen Yi Huang Vivien Sze Yiah Ngo Ya Qing Wang

Table of Contents 1. Introduction --------------------------------------------------------------- 2 2. Facts about the Consumer Electronics Industry --------------------- 3 3. Yips Globalization Drivers -------------------------------------------- 5 4. Industry Strategy --------------------------------------------------------- 9 5. Conclusion ---------------------------------------------------------------11 6. Bibliography -------------------------------------------------------------12 7. Appendix ---------------------------------------------------------------- 15

1. Introduction In this technologically advanced society, consumer electronics are greatly available and affordable to the mass population. 124 brands of digital TVs and 322 brands of digital still cameras are available for choice, according to market researcher NPD Group (Business Week, 2004). Resultantly, people are getting heavily reliant or even addicted to their electronic gadgets. Businessmen in London are halted in their dealings half the world over without their Blackberries; and students cant seem to detach themselves from their iPods or mobile phones. Even in the developing nation of Vietnam, the mobile penetration rate for year 2009 is at a high of 160.2% compared to 6.0% in 2004 (Euromoniter International, 2010). Defined by PricewaterhouseCoopers for the Consumer Electronics Association (CEA), consumer electronics (CE) include sector economic activity between (1) manufacture of consumer electronics and related products (referred to as manufacturing), and (2) the supply of content and services for these products (referred to as content) (PricewaterhouseCoopers, 2008). The CE industry is a multi-billion dollar business. Yet as more players surface in the market, profit margins are eroded. Shortening product life cycles and the ever evolving consumer needs require companies to be both a global yet responsive market player. This report recommends a transnational strategy based upon Yips globalization drivers.

2. Facts about the Consumer Electronics Industry As segmented by Euromoniter International (Global Consumer Electronics report, 2009), the industry has the various categories: in-home electronics, in-car electronics, portable electronics and computers. In-home and portable electronics account for majority of the sales at 41.6% and 46.8% respectively, while computers and in-car electronics each account for 6.6% and 4.9% of the total sales. In-home electronics consists of home audio and video products and personal computers. Portable electronics include cameras, camcorders, portable media players, mobile phones and portable computers. In-car electronics consist of in-car media players, speakers, navigation systems and other in-car electronics. The computer segment comprises desktops and laptops. The report also detailed volume sales growth of CE products at a compound annual growth rate (CAGR) of 11.3% between 2003 and 2008, reaching 2.7 billion units with a value above US$739 billion in 2008 (Global Consumer Electronics, 2009). This was due to strong sales of portable products and the miniaturization trend. In an industry mainly dominated by Japanese, South Korean and American manufacturers, the retail sector accounts for almost 80% of the worlds electronics sales. With the current market recovery, the global CE industry is forecasted to value at US$306.1 billion in 2013. In Deloittes report on the Global Powers of the consumer products industry, consumer electronics firms Hewlett-Packard (HP), Samsung Electronics, Panasonic (formerly Masushita), Nokia, Sony and Toshiba were ranked amongst the top 10 firms in 2008 by order of sales (Deloitte, 2010). Dell, LG, Canon and Phillips rounded the table for the top 10 electronics firms standing.

Based upon 2008s total CE sector sales figures from Euromonitor International at $739 trillion, the top 5 firms accounted for 62% of the overall market share. Market leaders HP and Samsung garnered more than 30% of the overall share, and made sales of US$118, 364 Million and US$112,804 million respectively.

3. Yips Globalization Drivers To better understand the strategy that should be adopted by firms in the industry, we look at Yips globalization drivers.

Competitive Drivers Due to the constant emergence of global competitors operating in similar markets, firms in the CE industry often have to adopt global strategies. In response to growing competition from leading Smartphone competitors like Samsung, HTC and Nokia and the wide-scale popularity of the Android operating system, Apple launched various versions of the iPhone within a span of few years. This demonstrates a strong interdependence amongst countries where competitors have to constantly engage in a globally integrated strategy to override possible lost of sales in certain markets to maintain their market standing. While there are five main manufacturers dominating the overall market, firms still face stiff pressure from other market players in different market segments. The slash of global average unit price of cameras by 38% over the past five years (Euromonitor International, 2010) is just one of the results of severe price erosion from this competition. As such, firms have to constantly seek cost savings to achieve their core competencies. Manufacturing in low cost economies like New Asia with finished products being shipped globally account for high levels of import and export activity in the sector (CEA, n.d.). A PricewaterhouseCoopers report (2008) showcased that exports of select CE products have experienced an estimated average growth of over 50% for the past decade. Though some may argue that nationalism may pressure CE manufacturers into localizing, research in China suggests that the impact is minor and likely to be short-term (Millward Brown

ACSR, 2008). An established brand image is still strongly associated with CE products from Japan and Korea, where a survey obtained 60% favorable responses. However, in South Korea where Samsung and LG hold 80% market share, entry of foreign brands may companies to readdress their strategies accordingly in order to reduce their losses (Business Week, 2010).

Cost drivers The last two decades have largely been defined by technological change (PricewaterhouseCoopers, 2008). The mass use and spread of internet, computers and mobile phones have revolutionized peoples ideas of life and ways of communication. The CE industry has to keep up with the fast pace of change and be readily prepared for shrinking product lifecycles (Morva, n.d.). A study by the California State Polytechnic University (Hossain, 2010) showed majority of CE products displaying significant experience curve effect. 86% of experience curve for camcorders showed that cost reduces by 14% whenever cumulative production doubles. A global strategy is essential to achieve these scales of economies and sourcing efficiencies in production and marketing and lower R&D costs for newer products. Operating in multiples countries increases the availability of the right market knowledge that enable cost advantages in logistics and operating costs. While this is possible for standardized products, customization often leads to rise in costs, and firms have to strike the balance between cost and availability of product variety in its offering to suit various market segments preferences. In this aspect, globalization could aid firms in developing cost advantages over their competitors.

Government drivers Governments often play a key role in facilitating the growth of an industry. With the growth of the industry rise global authorities like WTO with a series of policies and standards to govern the way firms operate. Adhering to global technical regulations, along with a superior product offering, often allows greater access to global markets. The increase in number of economic agreements amongst nations and regional groups also smoothed the path for the CE industry to bloom. With the Australia New Zealand Closer Economic Agreement (ANZCERTA), which came into effect in 1983, two-way trade between the two nations has expanded at an average annual growth rate of 9% (Australian Trade Commission, n.d.). However, the recent case of the Blackberry being blocked in the United Arab Emirates (BBC, 2010) showcased how government concerns could intervene operations in a country. The United Arab Emirates Telecommunications Regulatory Authority (TRA) reported judicial, social and national security concerns as certain BlackBerry services allowed users to act without any legal accountability. As a result, some phone services were banned for a period of time. In a separate case where the government set forth to promote the local industry led to delays in Apple iPhones market entry. A South Korean legislation in 2005 requiring the countrys handset makers and content providers to use its locally developed software technology hindered market competition, where the iPhone entered Korea more than two years after its U.S. debut (Ihlwan, 2010). As such, we deduce pressures for localization and globalization in this driver with respect to markets that firms operate in.

Market drivers The world demand for CE products has been increasing at a continuous yearly rate of about 4% to 6% (CEA, 2010). With globalization proliferates homogenization of consumer desires and needs across the world. Global marketing campaigns carry on similar themes and often, this prompts similar consumer wants. At the same time, customer needs may differ geographically or demographically. Firms have to consider local cultures and adapt advertisements accordingly to cultural and religious sensitivities. For example, in Middle Eastern countries, one takes the Muslim culture and gender (men are more important than women) issues into account when designing advertisements. Todays impulsive consumer demands more, resulting in 11-20% return of all electronics products sold (Business Week, 2008). Even while disposable income may be rising, consumers from developing nations mostly may instead prefer phones with simpler functions due to an under-developed network and need in higher-end gadgets. Firms need to be clear on the homogeneous aspects of a product that can be standardized to enable cost savings in production as well as access to a larger market. The firms ability to increase its global customers requires it to implement global strategies. Samsungs core competence in developing LCD panels has made it the global leader for supplying to major CE products like TVs and computers (Samsung Electronics, 2009). The availability of global distribution channels pushes global strategies. Apart from official retail stores, CE firms often have many authorized dealers and retailers all around the world. The strong demand in the products also sees them appearing in the aisles of hypermarkets and convenience stores like 7-11. With this, we see a higher pressure for globalization for the industry.

4. Industry Strategy Reconciling pressure between global integration and national responsiveness is often the key challenge while firms compete in the international market. A multinational strategy, while allowing CE firms to exploit local opportunities in a most convenient way, would cripple firms in the lack of coordination and sharing of potentially important knowledge that is learnt within individual markets. A global strategy would also be poor in its ability to react to local changes within individual markets, and this may allow competitors potential chances to challenge firms market share in certain markets. Following the analysis using Yips globalization drivers, adopting a transnational strategy which embeds both the advantages of both strategies discussed earlier would ensure CE firms ability to respond adequately on a global and local scale. In the market, brands are becoming increasingly similar around the world, although differences exist with regard to consumer value. The key for staying afloat the competition is to be differentiated through the firms core competencies. This holds true especially in this sector of fast-paced technological change where it is easy for firms R&D efforts to be overrun by obsolescence. CE manufacturers often locate manufacturing plants in cheap economies for their advantageous labor and resource costs while R&D centers situate in countries like Japan and India for their technical expertise. This dispersion of value creation activities allow them to achieve location advantages where resources are utilized more efficiently. At the same time, the presence of regional offices in the markets also allows firms to research and react to changes in the marketplace. All in all, these strengthen the firms core competencies to enable them to better engage competitors in both local and foreign markets alike.

With facilities spread across continents, it is important for managerial knowledge to be shared in order for effective policy integration and competitor response. Sound communication systems and channels have to be in place to ensure the right messages reach the right audience. Admittedly, there are challenges in day-to-day implementation as efforts have to be put into coordination across offices and balancing flexibility with centralization of systems. However, the advantages often outweigh the shortcomings. Basing centralization decisions upon value-chain activities was how Nestle successfully implemented the transnational strategy. With decentralizing decisions close to the consumer and centralizing supply chain decisions, Nestle profitably leveraged on its size and continues to thrive in the competitive F&B industry today (Wetlaufer, 2001). Similarly, CE firms could work on similar concepts to take into account both the market and value chain component of the transnational strategy. With a wide variety of phones, there is always a Nokia phone suited for the businessman, the music lover, or just the average old man on the street within its operating markets. On the part of its value chain, it has done well in integrating its global operations and manufacturing to ensure the best prices for the consumer. While it markets high-end, consumerorientated multimedia phones under the N-series, and business-orientated devices under the Eseries, Nokias brand image revamp has been limited against its rivals. However, as the market shifts to high-end Smartphones for the coming future, Nokia has to actively seek to adopt more aggressive measures to re-establish its leading position in this competitive market. Moving on in this age of technological convergence, only with developing their core strategy for global integration would CE firms thrive.

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5. Conclusion To conclude, there is no doubt that the consumer electronics manufacturers are operating their businesses increasingly on a global scale. With better coordination and integration of different parts of the value chain, manufacturers can enjoy huge economies of scale and tap onto greater amount of specialist knowledge. However, in this highly competitive and globalized industry, immediate local responsiveness has become more and more critical in order for a CE brand to stand out and distinguish itself. What has become the key to regional successes are tailored marketing strategies which properly interpret the local culture and quicker response to government or technical regulations. And a companys global impact could be based on nothing but its regional success. Thus, adopting a transnational strategy is definitely the way to go for the world of consumer electronics.

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6. Bibliography Australian Trade Commission. (n.d.). Australia New Zealand Closer Economic Agreement. Retrieved September 17, 2010, from http://www.austrade.gov.au/ANZCERTA/default.aspx BBC World News. (2010, August 1). Two Gulf States to ban some Blackberry functions. Retrieved September 17, 2010, from http://www.bbc.co.uk/news/world-middle-east10830485 Business Week. (2004, December 7). Consumer Electronics: Tech's Hit Machine. Retrieved September 18, 2010, from http://www.businessweek.com/technology/content/dec2004/tc2004127_5699_tc185.htm Consumer Electronics Association. (n.d.). Role of China in Competitiveness of U.S. CE Industry. Retrieved September 18, 2010, from http://www.ce.org/PDF/ChinaCompetitivenessCEIndustry.pdf. Consumer Electronics Association. (2008, April 01). US economic contribution of consumer electronics. Retrieved September 20, 2010, from http://www.ce.org/PDF/CEA_Final_Report_20080401_Lo-Res.pdf. Deloitte LLP. (2010, February 15). Global Powers of the consumer products industry 2010. Retrieved September 19, 2010 from http://www.deloitte.com/. Euromoniter International. (2010, August 23). Vietnams mobile phone market to grow rapidly with impending market deregulation. Retrieved September 18, 2010, from http://www.portal.euromonitor.com.libproxy.smu.edu.sg/Portal/Magazines/IndustriesHea vy.aspx. Goodale, J., Kuratko, D., & Hornsby, J. (2008). Influence factors for operational control and compensation in professional service firms. Journal of Operations Management, 26(5), 669-688. Ihlwan M. (2010, February 17). Korean Tech Is Losing Its Cool. Business Week. Retrieved September 18, 2010 from http:// businessweek.com/. Mellahi, K,, Frynas, J G., Finlay, P. (2005, March 31). Global Strategic Management. Oxford University Press.

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Millward Brown ACSR. (2008, October). Chinese nationalism and its impact on brands. Retrieved September 20, 2010, from http://www.wpp.com/NR/rdonlyres/E970BA910DA5-435E-8EDF-D14874D1E67A/0/chinese_nationalism.pdf Morva, T. (n.d.). The consumer electronics industry. Retrieved September 18, 2010, from http://ezinearticles.com/?The-Consumer-Electronics-Industry&id=353028 PricewaterhouseCoopers. (2008, April). US economics contribution of consumer electronics. Retrieved September 18, 2010, from http://www.ce.org/PDF/CEA_Final_Report_20080401_Lo-Res.pdf Samsung Electronics. (2009). Annual Report. Retrieved September 17, 2010, from http://www.samsung.com. Vossoughi, S. (2008, December 31). Consumer Electronics: Innovate or Die. Business Week. Retrieved September 18, 2010, from http:// businessweek.com/. Wasilewski, N. (2002). An Empirical Study of the Desirability and Challenges of Implementing Transnational Marketing Strategies. Advances in Competitiveness Research 10, no. 1: 123149. Wetlaufer, S. (2001). The Business Case against Revolution: An Interview with Nestle's Peter Brabeck. Harvard Business Review 79, no. 2: 112121

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7. Appendix 1. Consumer electronics product segments 2008

2008 Volume Share by Sector

6.6% 4.9% 41.6% In-home consumer electronics Portable consumer electronics In-car consumer electronics (aftermarket) Computers 46.8%

2. Top consumer products companies by product sector 2010

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3. US economic contribution of consumer electronics sector 2008

4. Consumer Electronics ownership and utilization characteristics, 1990 and 2007

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5. Consumer preferences on selected product categories from country of origin

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