The State of Business Strategy in the Mobile Phone Market

I originally wrote this piece in 2009. To this day, it is still my most viewed piece on my personal blog. I felt the need to update it, and I’ve added an entire section on my predictions for the future.

The Mobile Phone industry today is less of a mess than many analysts make it out to be. As tech-geeks, we get so wrapped up in the latest and greatest, we often forget that there is a lot of business strategy behind these cool toys we all love. Michael Porter is the founding father of modern business strategy. His innovations have brought us concepts such as the Value Chain to the Five Forces Analysis. Currently, he leads the Institute for Strategy & Competitiveness at the Harvard Business School, and when Omar Kadafi, the dictator of Libya decided he needed to revamp his economy to be less dependent on oil, he called up Porter to get his advice.

One of Porter’s key concepts are his Generic Strategies. These are a set of business strategies, a lens through which every business should be evaluated. The idea is that any business can be profitable – you just have to figure out how.

First off, here is a brief overview of Porter’s generic strategies:

Cost Leadership

This is the “Wal-Mart” strategy. A company must produce high volumes of standardized products to take advantage of economies of scale. The product must be a no-frills, low cost, and easy to manufacture. It is essential to be made available to a very large customer base. Even if the margins are low, the volume makes up for it.

Differentiation

A firm practicing the differentiation strategy gains their competitive advantage by creating products that have a perception of uniqueness. You must build your brand to cause a customers to choose your company over others. If done effectively, it eliminates customer buying power, leading to lower price sensitivity and high margins. Again, the key here is that uniqueness, which once established must be a continual process of innovation, because another firm can very easily imitate you and eliminate your competitive advantage.

Focus (market segmentation)

The key to the focus strategy is to zero in on a particular customer group, geographical market, or product line and gain a competitive advantage though product innovation and brand development. This is similar to Family Dollar, an inexpensive dollar store which targets poor urban American families who can not drive to the suburbs.

Defining these generic strategies are incredibly important at any level of business. There isn’t one that is necessarily better than the other, you just have to choose one and stick to it. You can be profitable in any one. Problems arise when you get caught in the middle with no defined strategy. That is how companies like GM fall from the sky.

So let’s start with Apple, who burst onto the scene two and a half years ago with the iPhone. It completely revolutionized the mobile phone industry, and every other company is still running to catch up. Every few months, another “iPhone killer” will pop up, only to fade into oblivion after a month or two: Blackberry Storm, Palm Pre, Samsung’s HD touch phone, the Motorola DROID, so on and so forth. Apple is the textbook definition of a differentiator: a lot of innovation which has developed an incredible brand loyalty that has very low price sensitivity. Apple’s margins are incredible.

Simply put, no one can touch Apple at the differentiation strategy. Forget how many units they sell, they’ll take the incredible margins. This is especially interesting today because they have a big slice of the pie and high margins. If they can keep that up they will be unstoppable.

RIM on the other hand, started off with a focus strategy: they had great innovation for business-specific users. Over the years, this has evolved into a mess of handsets across multiple carriers with no specifically defined plan. They tried to out-Apple Apple with the Blackberry Storm and later the Torch, both of which have been relative failures compared to the iPhone. They’re doing okay today, however I would question their long-term goals. It seems as though they are moving toward that proverbial loser’s circle in the “middle,” as they attempt to create devices that reach across all markets. They’re not necessarily the low-cost producer, they don’t innovate more than Apple, and they don’t have the same kind of brand loyalty, as we’ve seen the exodus of business users to the iPhone. As John Gruber put it:

IT executives smell a winner with iOS, and they want to hitch their careers to that wagon. It helps too, of course, that it’s a great platform.

Lately it seems like RIM is trying to make a play for the corporates one more time with the PlayBook, but again – there is no play until it’s shipped, and by the time they ship Apple will probably be on iPad 2.0.

At my company, I would anecdotally put the Blackberry to iPhone ratio at about 70/30, which is outstanding for Apple. RIM needs to figure out what they want. They can remain profitable, as long as they focus on what they’re good at: business users. There’s no question they “get” that market, and there’s probably still enough of a perception (correct or not) that power users should have a BlackBerry.

Next is Nokia. They tend to be the red-headed stepchild of the tech geek world. They have awful market share in the US, but are relatively strong in Europe and Asia, especially in developing markets such as Brazil and India. Like RIM they try to innovate with phones like the N97, but just can’t out-Apple Apple.

What they do have over any of their competitors worldwide though, is incredible market share. With all phones, they nearly double even the closest competitor. Given this market share, Nokia should be slashing costs left and right to become the cost-leader selling the cheapest phones. They should have economies of scale like no other, and yet Apple is the one out there negotiating amazing deals on component costs such as flash memory.

Finally Android. Kyle Baxter recently covered their business strategy in depth in a definite must-read article:

Google isn’t a web application company—they’re an advertising company. That’s what they do best, and that’s what drives their company. Of Google’s $23.6 billion of revenue in 2009, all but $760 million of it was derived from advertising, and nearly 70 percent of it was from Google’s own websites.

Everything Google does must be understood within this context.

For advertising to succeed, it’s all about eye balls. It puts Google in an interesting position, because they are both the Ad Network and the publisher. This is incredibly beneficial, because they control most places their ads are published.

This would put Google in the same strategy as Nokia. They have mastered it. They’re giving away their platform for free (to the consumer & phone manufacturer)

So what does this mean for the future of the mobile phone market? When I originally wrote this over a year ago, I didn’t know, but today I think I have a better idea of where things are going and what questions we should be asking.

Android is going to steal market share primarily from Nokia. In developing markets, companies are going to look for the cheapest alternative, and they are winning that. Huawei has even launched a $100 phone, and look for that to get closer to $0 over time (after carrier subsidies).

This growth will be key, if Apple really does launch on Verizon (and possibly the other carriers). I have postulated that in the US, given an apples to apples comparison, any consumer will choose an iPhone. iPhone on Verizon will eliminate a huge amount of demand for Android, unless those phones get cheaper.

The question for Google is, can Android truly drive enough profitability back to Google for them to continue to maintain it? They don’t depend directly on Android revenues, but it also can’t be a money pit. The good thing is that I’d imagine fixed costs aren’t terribly high – just salaries of engineers.

Blackberry is destined for a helpless oblivion unless they shape up and figure out their business model. Are they consumer facing? Do they make the best damn corporate phones out there? I personally know a decent segment of people who will only buy a BlackBerry because of the fact that it can get on Microsoft Communicator corporate messaging networks.

The question from RIM is if they’re willing to find a niche and be really good at it.

Apple will be Apple, and I’ve learned over the last decade not to bet against them as long as Steve is at the helm.

The important point is that this isn’t a zero sum game. The smartphone market is still growing, and will continue in the US and worldwide, and all these companies can grow and be profitable.

So many techies get caught up in battles about what’s cooler, easier to use, or more “open.” The products themselves matter, yes, but every mobile platform can be profitable in one way or another, just in the way that Walmart and the local mom and pop shop can both be profitable. They just need to know how their company and operations should look given that business strategy.

January 5, 2011