Manufacturing strategy Essay
1.1 Introduction to OFF Shoring and NEXT Shoring:
Off shoring is the type of relocation of an industry or an company of a business from one country to another i.e typically an operational process, such as manufacturing process. Next shoring is “the transfer of business or manufacturing processes to companies in a Nearby location. Where both parties may be benefited from one or more of the following dimension of proximity i.e Cultural, linguistic, political etc.,
1.2 Understanding the change in Market, Manufacturing Cost and Technology: Over the decade Manufacturing cost, market and Technology has played an important role in selecting the location of the Manufacturing industry weather it has to Off shored on Next shored. Therefore understanding these three are the major factors for selecting the location of an Industry.
Combination of economic force is fast eroding in developing nations cost advantage as an export platform for developed countries market. Mean while with an increasingly flexible work force and a better corporate sector is becoming more attractive place for manufacturing many goods consumed in the developed countries. An Analysis conducted by BCG (Boston Consulting Group) that by sometime around 2015 for many goods destined in the developed countries manufacturing in their neighbouring place is more economical than producing in the developed nations. The key reasons for this thought are mentioned below, Wage and benefits increases of 15 to 20 % per year at the average in developing countries which will slash the advantage over low cost states in the Developed countries. Because Labour accounts a portion of Products Manufacturing Costs. Transportation Cost, Duties, supply chain risks, Industrial real estates and other cost have increased considerably in the past decade this also plays a role but this additional cost will be differed at the minimum level when compared to developed and developing nations. Technology which is another major factor for choosing the Location of Manufacturing Industries.
Where Automation, R&D and other measures to improve the productivity in developing nations may reduce the manufacturing price but in modern decade Technology is wide spread it reaches every nook and corner at a rapid phase than in the 60’s. Market is the main criteria for an Industry to be started. An Industry which has started Next to its marketing area will have an advantage of immediate feedback, customer response to the product. Thus gives them an edge for R&D to develop their products to further level. Thus from our understanding change in Market, manufacturing cost and Technology will have a say on setting up an OFF Shore or a NEXT Shore location for an Product. 1.3 Drivers for OFF Shoring and NEXT Shoring:
1.3.1 Drivers For Next Shoring
Manufacturing companies look to externalise back office Responses on impact of Next-shoring on supply chain, services to focus on core operations. Risk associated with supply chain management are increasing in low-cost countries Labour wage rates in offshore locations in emerging synchronization economies like India, China, Indonesia, Thailand and Malaysia are increasing, as workers are demanding higher wages. Cost of shipping goods around the world is rising due to Lead times and higher fuel price Eastern Europe has emerged as a location for Next-shoring operations, backed by favourable factors like highly skilled talent, especially technical talent and close proximity to end markets like the UK. Other factors include cultural similarities, time zone and strong data protection laws Tax incentives are usually not the main driver but they could tip the balance just as manufacturing taxes may make a country less attractive.
1.3.2 Drivers for OFF Shoring:
Key driving forces for demand shifts to the developing countries are economic growth, demographics and rising incomes in emerging markets, in particular in Asia. further major factors driving this trend are: – Localisation of products to address local mid market
– Proximity to demand and regional raw materials resources – Vast scale of operations and flexibility
– Diligence and industrial skills of workers
– Better “time to market” and reduction of logistics costs
ASIAN economies have emerged as major sourcing destination for global companies. Growth of the employable population and increased investments in the region. National/regional regulatory effects (safety standards, etc.) and free trade agreements. Within Asia itself, a shift can be noticed as rising wages and higher costs in china are making manufacturers consider other locations in southeast Asia. ASIAN countries like India, Cambodia, Laos, Thailand and Vietnam provide a dynamic talent pool with highly educated and young people as well as lower wage costs.
1.4 Debate on “In future, next shoring, not the off shoring, drives manufacturing location decision” According to me I accept the topic “In future, next shoring, not the off shoring, drives manufacturing location decision”. In the Next future next shoring is what the manufacturing industries will consider to have competitive edge over the market.
Over the past few decades there has been an advantage over the cost (like Labour, land) in developing countries over developed countries. Eg. In India, China, etc., where the manufacturing industries have got much cheap labour force and land for their industries to start. They have enjoyed a great success by installing their manufacturing units in these low cost locations. But in recent years the advantage over the cost has shrinking due to globalisation and annual wage rise, which might see off their advantage over the developed nation.
Rewind 15 or 20 years. Offshoring was all the rage. As far back as 1979, companies were starting to send manufacturing to low-wage destinations like India, China, Taiwan and Vietnam to lower labour costs. According to John Shook of the Lean Enterprise Institute, “There was a herd mentality to offshoring and an inability to see the total costs.”
Today, wages in Asia are rising from 15 to 20% annually, according to The Boston Consulting Group (BCG). As a result, the economics of manufacturing in India, China, Taiwan and Malaysia aren’t as appealing as they once were. In fact, today, manufacturers are doing something that would have been unthinkable a decade ago: they’re bringing manufacturing home.
A few examples: in January, Bill Simon, Wal-Mart U.S. President and CEO committed to buy $50 billion of American-made products over the next 10 years. Similarly, after producing appliances offshore for years, General Electric is moving production operations back to the United States. GE CEO, Jeffrey Immelt, stated in the Harvard Business Review that outsourcing “is quickly becoming outdated as a business model for GE Appliances.” According to The White House blog, Ford, Apple, and Caterpillar are making large investments in U.S. facilities.
Thus according to the above points I accept “In future, next shoring, not the off shoring, drives manufacturing location decision”
1.4.2 A Case Study for selecting Next Shoring than off shoring: Melville, N.Y.-based MSC Industrial Direct Company, a direct marketer and distributor of metalworking and maintenance, repair, and operations supplies, distributes approximately 600,000 industrial products from 3,000-plus suppliers to 320,000 customers. Global sourcing is here to stay, whether operations are in Mexico, China, or other countries, said by Doug Jones, the company’s executive vice president of global supply chains in 2013. There is just as much opportunity in global sourcing as there was five years ago—if not more. “They used to be focused on China or India, but their Shanghai office now is looking at a number of countries.” There is pressure to source in America, and MSC Industrial Direct’s product offering takes that into account. “The way we go to market is to have a ‘Made in the USA’ product in every category,” Jones said this earlier this year. Global sourcing does brings challenges, however. The company follows a rigorous process to qualify a new production source, with a focus on quality. MSC also weighs the impact of lead time on cost and service. We realize our service model increases from 10 or 15 days to 180 days from purchase order to receipt if we source in China or India,” Jones explains. “We weigh the additional investment in lead time and inventory, currency valuations, and other factors, and make sure our total landed cost (TLC) still looks good or almost equal to cost in USA, Where they receipt the product at much less time. Monitoring TLC is no small task at MSC, which maintains a global sourcing team dedicated to managing it. This add further cost to monitor. On considering all these MSC starts to Next shoring its supplier base to market area
Thus from the above case studies and market analysis it’s time to move on from OFF shoring to Next shoring in the Near future which seems more economic and fruitful for manufacturing sector. Even though OFF shoring at present seems more economic currently but in the Near future we are expecting the wage rise factor which would nullify the cost advantage in developing nations and will make the manufactures to rethink on their strategies of OFF shoring and tends to change their strategy for Next Shoring. Thus “In future, next shoring, not the off shoring, drives manufacturing location decision”
2.1 Role of Korean Culture in Samsungs Success:
It has become increasingly important for employees to have vested stake in the growth potential of its company. People expect a participatory work environment where they can feel a sense of dignity, pride, and ownership of the organization’s vision. Samsung Mobiles strives to build a creative organizational culture, and acknowledges that the investment we make in strengthening the core competencies of our employees will have a direct impact on our competitiveness. We actively promote a flexible organizational culture that allows employees to pursue a healthy work-life balance, in a dynamic, creative and challenging work environment that is not risk-averse. As an international company we embrace individuals with different background and abilities.
Korean Culture :- Work & Life Balance through Work Smart
Samsung Mobiles has not only contributed to balancing work and life but also to improving productivity by adopting a flexible work schedule in Korea to help eliminate unnecessary overtime and to maximize work performance through effective time management. We introduced a pilot, flexible work schedule in our TV, mobile phone, and consumer electronics sectors beginning in 2009 and expanded it to all divisions in 2010.
Under this new effort, employees arrive at work between 6.00 a.m. and 1.00 p.m. and to work eight hours per day. As of March 2012, approximately 65,000 Korean employees have taken advantage of this system out of a total of 100,000 Korean employees.
Samsung believed it is important for everyone to be able to assume personal responsibility for their time. This will continue to contribute to a working atmosphere that allows employees to focus on their job in an autonomous and creative atmosphere.
Thus they branded this as Work smart strategy. This helped Samsung a lot in its success.
Work Culture that Encourages Learning and Development
Samsung Mobiles has established a Creative Development Research Institute System to provide employees with opportunities to pursue creative new ideas that take full advantage of their talents and professional passions in a way that encourages taking risks. This new initiative encourages employees to be more entrepreneurial in developing creative ideas that can become new businesses. Once an employee’s plan is accepted, they may concentrate on the project as a member of a task force for up to one year. During this period, they will be free from their usual responsibilities and may receive a dedicated work space, development expenses and necessary equipment as appropriate. Successful outcomes are encouraged through an incentive program; however they are not subject to penalty if they don’t achieve their goals.
The first outcome of the Creative Development Institute, ‘eyeCan,’ was launched in February 2012. The eyeCan is a special mouse for the disabled, which allows its user to use a computer using eye movement. Samsung Electronics will continue to support similar technology projects that our talented workforce introduces to assist those in need.
2.2 Analysis of Samsung Mobiles using P.E.S.T and Poter’s 5 Force Model:
As the main objective of this thesis is to analyze the European and the U.S. mobile phone markets, the selected framework supports this aim by approaching the markets on two different levels. Primarily, the analytical framework focuses on micro-environment i.e. looking at the markets from the viewpoints of the actors (suppliers, distributors, customers) and from that of competition. To analyze the contribution of each of these actors and other sources of competition, another well-established model, Porter´s five forces, will be utilized (Section 2.3). Where necessary, the observed phenomena are also interpreted from a wider, macro environmental perspective although more detailed analysis of macro-environmental factors will be omitted. The exclusion is justified by the fact that competition, even though influenced by the macro environment, takes place within the micro environment. In addition, concentrating on the micro-environment allows a broader and more in-depth treatment of the most relevant actors present in the micro-environment.
On another dimension, the framework applies two different conceptual approaches, namely, international business (IB) environment and industrial organization (IO) economics. These approaches together serve to supplement the strongly microeconomics focused framework with suitable concepts grounded in the strongly 7 related IB and IO disciplines. While the industrial organization focuses on the company/market boundary from the perspective of imperfect competition, international business focuses on the qualities of international markets and companies operating across country boundaries. These approaches will be discussed in detail in Section 2.4. The analytical approach of the thesis is summarized in .
Figure 1. Analytical framework of the study
By definition, the macro-environment involves factors outside of the direct control of the business. These factors, then, include the economy, government policies, social changes etc. A firm may, for example, be influenced by new legislation or changes in taxation policies but the firm rarely has power to shape them itself. Thus, macro factors have the ability to fundamentally change the environment of an organization but the relationship is typically one way. (Gillespie, 2007) One of the most utilized frameworks to analyze the macro factors is the PEST analysis.
The PEST framework stands for “Political, Economic, Social, Technological, Environmental and Legal” and is used for analyzing the macro-environment in which companies operate and which also significantly affects each business independent of its size (Johnson et al., 2006:65) in each case including (or excluding) some factors and giving more weight to some in comparison to others. However, it always aims at capturing the essential of the macro-environment under a few broad categories to facilitate understanding and management of each factor within the business and to identify the key drivers of change (Johnson et al., 2006:69).
Table 2.1. Components of the PEST analysis (Gillespie, 2007)
Even though the macro-environment will not be analyzed in detail in this thesis its influence in a company’s decision making processes is evident as well as its ability to change to conditions under which competition takes place. For example, the Finnish government’s decision to allow bundling of mobile phones had a direct impact on both handset manufacturers’ and mobile operators’ business. Thus, references to the macro environment and changes in it will be made alongside the analysis on companies and their micro-environment.
The micro-environment can be defined as consisting of “stakeholder groups that a firm has regular dealings with” (Gillespie, 2007). For the purpose of this thesis, the focus will be on suppliers, distributors, customers and competition as illustrated in Figure 1 following the concise definition of micro-environment by Gillespie (2007).
In regard to its suppliers, any company generally needs to address questions such as “Can they provide the quality we require at a good price?”, “Can they adjust to changes in the supply volume?” and “What is out power relative to our suppliers and vice versa?” Increasingly, however, large multinational companies in particular are concerned about the ethicality of their suppliers’ operations. Recently, for example, Samsung was alleged to have used so called ‘blood metals’ in their mobile phones, to which Samsung responded by implementing yet more stringent systems to track the origin of its raw materials (Yle, 2010). Especially in the business of mobile phone manufacturing, suppliers and supply chain management (SCM) play a crucial role. Since mobile phones, smart phones in particular, contain numerous highly specialized components and modules, handset manufacturers generally acquire most of the components, software and even assembly from their suppliers and subcontractors (see the mobile phone value system in Figure 9). Samsung, for example, lists 35 countries as its main supplying locations and applies its so called Code of conduct to all its business partners. In the Code of conduct (Samsung,2011f) Samsung states that
“…Samsung encourages its partners, subcontractors, or suppliers to strive beyond legal compliance in areas such as governance, human rights and the environment. Samsung incorporates ethical, social and environmental criteria in its procurement agreements and commits to monitoring the performance of its partners and to taking immediate and thorough remedial steps in cases where the ethical performance of its business partners comes into question.”- Samsung
Thus, mobile phone manufacturers rely on suppliers to varying but generally great extent and can even be held responsible for choosing suppliers that use e.g. child labour or non-recyclable materials. To construct an iPhone, Apple, for example, sources its Retina display from LG, the A4 processor from Samsung, gyroscopes from STMicroelectronics, touch sensitive panels from Wintek and TPK, and chips from Skyworks Solutions and TriQuint Semiconductor (Apple Insider, 2010). However, some conglomerates, e.g. Samsung manufacture most of the modules in-house which enables cutting down the number of suppliers and facilitates integration in the production process. Even if the recent business wisdom has advised companies to divest non-core functions and focus on a few core competencies, Samsung has proven that conglomerates may be highly profitable while retaining their non-core parts. Unlike Motorola, Samsung kept its component manufacturing in-house and focused on synergies from producing both components and end products. (Hyöty, 2011:250-252)
The second essential element of a company’s micro-environment is distributors. The choice of distribution channels is critical for a number of reasons. Firstly, the distributors strongly influence the final sales price of each product and thereby directly affect the sales quantity. Second, the distributors and later retailers play an important role in how the product is presented to the customer and, to some extent, how it is positioned relative to competing products. Finally, the choice of the distribution channel affects how customers perceive the brand. While Samsung, for example, utilizes a wide range of sales channels for its Samsung branded products, it sells its luxury phone brand Vertu (typically gold and diamond decorated, ranging from $6000 to $300 000) only in Vertu and Samsung flagship stores (Vertu, 2011; Dialaphone, 2007) In the mobile handset business, the distribution channel plays a crucial role. While in Europe most mobile phone manufacturers rely on a large number of individual distributors and retailers, in North America the bulk of handset sales is carried out by mobile network and virtual operators (see Figure 22). The long-lasting dominance of mobile operators over distribution in the United States has allowed them to introduce additional requirements related to e.g. tailoring and branding of phones, and together with subsidies a commanding position in the industry. Still, the choices related to distribution come down to the same basic questions, i.e. what are the total costs, how is the brand communicated, how flexible is the distributor etc.
The third element of the company’s micro-environment is customers. In this respect, it is common to separate between individual consumers and organizational (or industrial) customers (or buyers). While consumers are traditionally considered less rational and impulsive in their decision making process, companies tend to be viewed as professional buyers following strict budget, cost and profit considerations. (see e.g. Webster & Wind, 1972; Baumgartner & Steenkamp, 1996) These kind of clear differences in purchasing behaviour have been questioned (Wilson, 2000) and today’s B-to-B marketers widely recognize that emotions play an important role also in business buying decisions (Kotler & Armstrong, 2006:178).
In the mobile phone business, consumers represent an enormous variety of tastes, preferences and affluence. In developing countries, the sales of low-end mobile phones (often under $50) dominate, while in developed markets of e.g. Europe and North America, consumers often opt for more advanced models incorporating cameras, GPS navigation, Internet browsing etc. Moreover, most of these consumers appreciate value added features and post-purchase services provided by the manufacturer (e.g. Apple App Store, Nokia Ovi Store and Google Android Market) and often base their purchase decision on the combination of the phone and the availability of these services (see e.g. Singh & Goyal, 2009). Industrial buyers, on the other hand, tend to value services related business use of the phone (e-mail, data security etc.) and supplier’s ability to provide a communications solution to the company instead of only handsets.
Finally, with regard to the mobile phone industry in Europe, Asia and the United States, there are some significant differences in customer profiles. While in Europe & Asia a handset manufacturer can sell both directly to the consumer and via distributors and retailers, in the United States the only major customer is the operator that, then, functions as a distributor and retailer. This, obviously, has its effect on what kind of marketing is needed to reach the end customer.
The Merriam-Webster dictionary defines competition as “the effort of two or more parties acting independently to secure the business of a third party by offering the most favourable terms”. (Merriam Webster Online, 2011) Correspondingly, The New Palgrave Dictionary of Economics states that “competition arises whenever two or more parties strive for something that all cannot obtain.” (Stigler, 2008) In this thesis, these competing “parties” are handset manufacturers who act to “secure the business” or “strive for” the limited resource, i.e. the money, of their customers.
In terms of developed economic theory, competition is one of the most researched areas of economics. Economists generally differentiate perfect and imperfect competition, concluding that no other system is more Pareto efficient than perfect competition.
According to Organisation for Economic Co-operation and Development (OECD, 1999) perfect competition is defined by four conditions:
a) There are such a large number of buyers and sellers that none can individually affect the market price. This means that the demand curve facing an individual firm is perfectly elastic.
b) In the long run, resources must be freely mobile, meaning that there are no barriers to entry and exit.
c) All market participants (buyers and sellers) must have full access to the knowledge relevant to their production and consumption decisions.
d) The products should be homogenous.
Imperfect competition, thus, occurs when any of the criteria for perfect competition is not satisfied, e.g. when there is information asymmetry between buyers and sellers, either buyers or sellers are able to influence prices or products are not homogenous.
In regard to the mobile phone industry, there is a clear case of imperfect competition. Firstly, the three largest manufacturers Samsung, Samsung and Nokia held about 64 % of the global unit sales in Q1/2010 while the tenth largest Huawei had 1,3 %. (Gartner, 2010) This kind of a market situation is generally referred to as an oligopoly “in which producers are so few that the actions of each of them have an impact on price and on competitors” (Merriam Webster Online, 2011). Second, there are fairly high barriers to entry due to the capital intensive nature of the business. In addition, gaining market share generally requires significant investments in marketing and established manufacturers can benefit from advantages of scale.
Poter’s 5 Force Model
The Porter’s five forces model has been criticized, for example, for its underlying assumptions. Firstly, an industry is assumed to consist of an unrelated set of buyers, sellers and substitutes and competitors that interact at arm’s length. Second, companies can gather wealth that allows them to erect barriers against existing competition and new entrants thereby creating structural advantage. Finally, the prevailing uncertainty is assumed low enough to permit predictions about the participants’ behavior and choose a strategy accordingly. In addition, one should also note that the model was developed more than 30 years and, since then, new industries have been born and the old ones taken new shapes. In an argument that the classical model such as the Five Forces and value chain analysis were designed for the analysis of traditional industrial firms and do not apply well to today’s knowledge-intensive companies.
Figure 2.2 Porter’s Five Forces –model
The rationale for choosing the Five Forces framework was as follows. The model was to be well-known and tested. Even though Porter’s model has been criticized for its applicability to certain industries and for its assumptions, few models have gone through such thorough testing and prevailed. While no model is perfect the limitations of the Porter’s framework are, nevertheless, well-known and documented. Finally, the use a widely accepted framework facilitates reading and interpretation of the results as opposed to some other model with less prevalence and academic/practitioner interest.
Table 2.2 Opportunities and Threats for Samsung Mobile
2.3 Suitable Business strategy to overcome threats and grab Opportunity in Samsung: Global R&D (Research & Development)
In 2003, Samsung invested 3.5 trillion won ($3 billion) or 8% of total revenues in R&D. It acquired 1,313 US patents in 2003, ranking it 11th in the world in US patent awarded. (Exhibit 9) Samsung has about 19,700 researchers working in R&D. Researchers account for approximately 34% of its total employees. Every year, R&D engineers developed about 100 new technologies and they work on the development of core technologies in the fourth generation (4G) mobile communications and in next generation memory chips.
Samsung’s Information and Telecommunication R&D Center is in Suwon, where the company’s headquarters are located. This R&D Center was designed to incorporate all of its business specialties—semiconductors, electronic components, multimedia, and telecommunications—to maximize technological synergies among them. The Suwon R&D Center also interconnects with other R&D centers, both in Korea and in other countries.
In the mobile business, Samsung has applied for 12,000 patents in Korea and 25,000 patents overseas since 1998. The main focus of R&D is the development of new technology standards for 4G communications and the mobile Internet. Samsung holds approximately one hundred patents related to 3G and 4G technologies. Recently, Samsung sold its cdma2000 1x EV-DO system to Japan and Southeast Asian countries.
Samsung’s clever marketing strategies played an important role in lifting Samsung’s image from that of a low-end manufacturer to that of a global digital technology leader. For effective global marketing and branding, Samsung established a new organization to deal with its integrated global marketing activities. Eric B Kim, who used to work at IBM, was recruited to lead the Global Marketing Department. One of his most important decisions was to cease all existing contracts with 55 advertising agencies and to sign a $400 million contract with one ad agency, FCB Worldwide. Since then, Samsung has unveiled a series of corporate branding campaigns and the slogan, “Samsung DIGITall: Everyone’s invited.”
One of Samsung’s major global branding strategies is Olympic sponsorship. In 1996, Samsung was an unofficial sponsor of the Atlanta 1996 Olympics, having sponsored the Samsung Expo in the Pavilion of the Main Stadium. In the same year, Kun Hee Lee was selected as an IOC member, and Samsung received an opportunity to participate in TOP (The Olympic Partners).
The IOC proposed that Samsung participate in sponsoring the home appliance category for the Olympics. However, Samsung wanted to utilize the opportunity to promote a high-tech image, and felt that the home appliance category was not enough to emphasize Samsung’s technological advances. Samsung set its sights on the telecommunications category and believed that, through the Olympic sponsorship, it could shed its image as a low-end home appliance maker and reposition itself as a high-tech mobile communications company. To win the sponsorship negotiations, Samsung concentrated its marketing resources on the mobile phone business.
Samsung’s Key Issues to rectify their threats
Though Samsung has continued its success in the mobile phone business, it faces a number of challenges to keep the growth momentum in the future.
First, competition in the mobile phone market will become more intense. Lower entry barriers will bring in more competitors to the market, and the “digital convergence” will accelerate the competition even further. Companies from other industries such as PCs or network services will compete directly with Samsung. As such, it will have to devise more creative win-win strategies in the highly uncertain digital convergence landscape.
Second, the sustainability of Samsung’s high-end strategy, which was attributed to Samsung’s brand building, may be in question. Samsung has achieved high profit margin, which is comparable to that of Nokia, mainly based on its high price, while Nokia has done so based on its cost dynamics. In terms of per-unit cost, Nokia spends less on R&D and marketing. One might doubt whether the high-end strategy can really be sustainable.
As the mobile communications market becomes saturated, future revenue sources will come mainly from emerging markets (China, Brazil, India, Eastern Europe, etc.). First-time buyers in emerging markets tend to prefer affordable phones. This could hurt Samsung unless it begins to cover the low and middle-end markets. Nokia and Motorola, as well as many newcomers from China, have already targeted those emerging markets. How to compete in the low and middle-end markets, while preserving its premium brand image, will be important questions in Samsung’s future growth.
Third, Samsung is highly dependent on foreign companies for core technologies and modules. For example, it sources core CDMA base-band chips from Qualcomm and sophisticated camera-phone modules from Japanese firms. Consequently, the proportion of royalty payment in total manufacturing cost is likely to increase unless Samsung develops its own technologies. Some industry experts argue that most of Samsung’s patents are on applied technologies, which are developed based on others’ patent-protected core technologies. Recently, Samsung experienced a shortage in the supply of Qualcomm chips and camera-phone modules. This suggests that Samsung’s high dependency on core technologies and product modules would threaten not only its future profitability but also its competitive position.
Product Life Cycle of Samsung Galaxy :
For my analysis it will be useful to understand how Samsung has introduced its Galaxy Smartphones. The introduction stage of a product is one of the most important, because in this stage a company positions its products in the market. In order examine the strategic choice of the company I need to understand the strategic possibilities in the introduction stage of a product. According to Kotler and Keller, company’s positioning and differentiation strategy must change throughout the life of its products. I will give a brief description of the stages of the product life cycle and strategic possibilities in each of these stages. According to Kotler and Keller to be applicable to a product the assumptions behind the life-cycle are that the product must have limited life; sales go through different stages, with different challenges, opportunities and problems; profits change at different stages; products require different manufacturing, financial, marketing, purchasing and human resource strategies in each life cycle stage. The Smartphone products fulfill these assumptions. Kotler and Keller recognize 4 different Life-cycle stages for a product.
Introduction is a period of slow sales growth as the product is just introduced. It is also recognized with heavy advertising. According to Shaw (2008) in the introduction stage a company can choose by penetration strategy or niche strategy. A penetration strategy involves aggressive marketing mix and product for the mass market offered at a low price. A niche strategy according to Shaw (2008) involves a narrow market segment and a higher price. In this stage Shaw (2008) recognizes only two possibilities targeting the mass market with low price and a niche strategy involving higher price. Looking at the smartphone market it is possible for the companies to target mass market with higher price as for instance iPhone & Nokia does. This is also due to the affordable terms of the mobile operators where people can buy the Smartphone on leasing.
6.2 Growth Stage
This is a period of rapid growth and market acceptance. Here the profits are higher. According to Shaw (2009) in the growth stage companies can choose between two strategic options these are segment expansion and brand expansion. In segment expansion, the company can add new target segments, with their own marketing mixes. Strategic alternative to segment expansion might be brand expansion. This strategy adds new products or variations to the existing line. The strategy delivers to the customer segment bigger choice, or greater value. Some of these strategy ideas might be delivery, gift-wrapping (Shaw, 2012).
6.3 Maturity Stage
In maturity stage the sales are lower as the product is already bought from most of the Potential buyers (Kotler and Keller 2009 p.490). According to Shaw (2010) in Maturity stage it is common for a company to employ s stable marketing mix. As the Product moves further on the curve harvesting strategy becomes necessity.
6.4 Decline Stage
Here sales decline and profits erode (Kotler and Keller 2009 p.490). In this stage Shaw (2011) recognize only divesting strategy as an option.
The following picture shows the life cycle of Samsung Galaxy (first model in Smartphone ) by Samsung which was launched in 2008. Where in the introductory period it was blooming since it was on affordable cost. This model was soon hit in the market. In 2009 its has started its tremendous growth. In around 2010 it reached its maturity state. Where Samsung enjoyed a lot on its success. This encouraged Samsung to do R&D in Galaxy model and they started to develop a lot newer version. Due to introduction of new models and everyone had the current model, Galaxy has started to decline in 2011.
Figure 2.2 Product Life cycle of Samsung Galaxy