As TomTom, one of the largest producers of satellite navigation devices in the world, entered 2010 it faced stiff competition from its traditional rivals such as Garmin and from new competition from cell phones. Although its sales reached an all time high of €1.74 billion in 2007 by 2008 sales had slipped to €1.67 billion. That year the company posted a loss of €872 million. The decline in sales continued with 2009 sales slipping to €1.48 billion, although the company managed to post net income of €86 million that year. TomTom employed over 3,000 employees in 40 countries. Since its founding in 1991, the Netherlands-based company experienced steady growth. It offered an array of information services and devices aimed at the consumer and business markets. It led the navigation market in Europe, and was second to Garmin in the United States.
In 2007, it outbid Garmin to acquire Tele Atlas in a vertical integration strategy to control the map creation process. TomTom paid €2.9 billion for Tele Atlas. As 2009 came to a close, Google announced it would offer turn-by-turn navigation within cell phones. Google said the product, initially limited to driving directions in the U.S. would be free to consumers. As the U.S. and European markets for navigation devices matured, TomTom was faced with decisions related to the relative emphasis it should place on its stand-alone navigation devices, built-in navigational units for automobiles and aviation, and business devices and services aimed at companies with large mobile workforces.
Suggestions for Using the Case
Students should find the TomTom case interesting since many of them probably own a GPS unit or use a smartphone- based GPS application. The Nintendo case is excellent for drilling students in applying the concepts and analytical tools covered in Chapters 4 and 5. The case provides sufficient information to allow students to fully examine the competitive forces at play in the personal navigation industry, consider the industry’s driving forces and key success factors, and examine TomTom’s internal situation. In addition, the case’s decision focus allows students to consider what TomTom must do to survive in an increasingly competitive environment.
To give students guidance in what to do and think about in preparing the TomTom case for class discussion, we strongly recommend providing class members with a set of study questions and insisting that they prepare good notes/answers to these questions in preparing for class discussion of the case. You may also find it beneficial to have your class read the Guide to Case Analysis that is posted in the student section of the Online Learning Center for the 18th edition at www.mhhe.com/thompson. Students will find the content of this Guide particularly helpful if this is their first experience with cases and they are unsure about the mechanics of how to prepare a case for class discussion, oral presentation, or written analysis. TomTom: New Competition
*This teaching note was prepared by Professor Woody Richardson, Mississippi State University. We are most grateful for his insight, analysis and contributions to how the case can be taught successfully. *
In our experience, it is quite difficult to have an insightful and constructive class discussion of an assigned case unless students have conscientiously have made use of pertinent core concepts and analytical tools in preparing substantive answers to a set of well-conceived study questions before they come to class. In our classes, we expect students to bring their notes to the study questions to use/refer to in responding to the questions that we pose. Moreover, students often find having a set of study questions is useful in helping them prepare oral team presentations and written case assignments—in addition to whatever directive questions you supply for these assignments.
Hence, we urge that you insist students spend quality time preparing answers to study questions— either those we have provided or a set of your own questions. The case can be used effectively for a written assignment or oral presentation. Our recommended questions for written assignments are as follows: You have recently been hired by TomTom as a new market analyst and have been asked to assess the attractiveness of the personal navigation industry and determine TomTom’s competitive strength. Please prepare a 5-6 page report that evaluates competition in the industry, assesses industry driving forces, and lists industry key success factors. Your report should also include an assessment of TomTom’s internal situation and makes specific strategy recommendations that will allow TomTom to improve its market and financial performance.
1. What strategy is TomTom pursuing? 2. How well is the strategy working? 3. Does the satellite navigation industry offer attractive opportunities for growth? What kind of competitive forces are industry members facing and how do the forces influence the outlook for industry profitability? 4. What are the strengths and weaknesses of TomTom? What are the threats and opportunities facing the company? 5. Do you think TomTom’s shift to value-added services and making Personal Navigation Devices a smaller portion of total revenue will be enough to sustain it in the near future? Is this strategy consistent with the needs of markets outside North America and Europe? 6. What recommendations would you make to TomTom management to improve its competitive position in the satellite navigation industry, take advantage of market opportunities, and defend against external threats?
Teaching Outline and Analysis
1. What strategy is TomTom pursuing?
For the most part, TomTom has followed product development and market development strategies with clear emphasis on differentiating its product. Its 2007 acquisition of Tele Atlas was clearly illustrative of vertical integration. Through the years its acquisitions and patent development display elements of an offensive basis of competitive attack based on pursuing continuous product innovation to draw sales and market share away from less innovative rivals. A good use of the history section of the case is to have students classify or label TomTom’s historical actions related to products and markets into product development or market development. The results might look like the following table.
Time Action Described in Case Strategy
Software development for handheld computers to commercial applications.
Product Development & Market Development
1996 Announced first navigation software Market Development
2001 Entered Mobile car satellite navigation market Market Development 2006-2008
Acquired Datafactory AG to power TomTom Work
Acquired Applied Generics for Mobility Solutions.
Acquired Tele Atlas for map creation
2009 TomTom for the iPhone released Market Development
The TomTom Group consisted of TomTom (Business to Consumer), Tele Atlas (Business to Business), WORK (Commercial Fleets), and Automotive (Auto Manufacturers & Suppliers). In response to the economic downturn that began in 2007, increased competitive threats, and growth declines in the U.S. and Europe, the company shifted its business mix toward value-added services. The potential results of this attempt to make personal navigation devices (PNDs) a smaller proportion of total revenue were at best uncertain.
2. How well is the strategy working?
The short answer is that up until the global economic downturn beginning in 2007 and continuing in 2008, TomTom’s strategy had produced outstanding results. However, as the losses in 2008 indicate, the strategy bears scrutiny. The downward pressure on prices due to competition and the slowing of discretionary expenditures due to the global recession produced a financial strain on TomTom. An examination of Case Exhibits 3 and 4 reveals the following trends from the first Quarter of 2008 to the first quarter of 2009: ν European Revenue Down 22%
ν North America Revenue Down 52%
ν Global PNDs sold Down 29%.
At the same time, the selling price and overall operating margins had been decreasing since 2007.
The gross profit margins from 2006-2009 were as follows: 2009 2008 2007 2006
50.6% 53.3% 56.0% 57.6%
This caused net income to drop much more precipitously than the decline in sales. Couple this information with a debt load over €1 billion due to the acquisition of Tele Atlas and the company appeared to be in a financial bind. For all of 2008, the company posted a loss of €872 million.
3. Does the satellite navigation industry offer attractive opportunities for growth? What kind of competitive forces are industry members facing and how do the forces influence the outlook for industry profitability?
The outlook for industry profitability is not what it was 5 years ago. Students should be able to develop an outlook by using Porter’s Model of Industry Attractiveness as discussed in Chapter 3 of the text.
Rivalry among Competing Sellers
Rivalry will intensify as industry growth in US &
Europe slows. Margins will continue to decline. Firms will fight to utilize capacity through further price cuts. Growth in China & India would mitigate the rivalry intensity.
Big Box stores exert strong pressure on price, terms & delivery. Car makers also exert strong influence owing to their purchasing power.
Very limited influence as all key components are controlled through vertical integration.
Threat from Substitute Products
Threat – Cell phones for PNDs predicted to dominate by 2013. Less Threat – Fleet management & Automotive markets.
Potential New Entrants
Nokia’s acquisition of Navteq signals their intent to integrate phone and navigation services. Google’s announcement also signals its entry into the market. Up until recently the industry was much more attractive. Physical maps were not much of a threat as a substitute, but by 2009 the industry was undergoing a sea change regarding cell phones as substitutes. For the younger consumers who have never not known cell phones, the expectation that navigation be a common feature will be a strong force in the market just as many in this generation only wear watches as fashion ornaments because they are never without their cell phone. These tech-saavy consumers may eschew separate devices for navigation.
4. What are the strengths and weaknesses of TomTom? What are the threats and opportunities facing the company?
• Brand Name Recognition
• Map creation capabilities
• Innovative features
— Points of Interest
— Traffic updates
• Automotive partnerships
• European market share
• Sales declines
• Shrinking margins
• Debt load since Tele Atlas acquisition
• Relative weak sales outside Europe & the
• Stand alone (separate) products
• PND unit sales decline
• Multifunctional devices (cell phones/smart phones) popularity is growing • Strong Competition from Traditional competitors – Garmin & Magellan • Strong Competition from new competitors – Nokia & Google • Potential legislation to restrict/ban navigational devices from autos • Aging satellites that support GPS
• Growth of India & China
• 65% of U.S. adults don’t own any kind of navigation device of any kind • High fuel prices encourage better fleet management & fuel efficiency for consumers • Environmental concerns encourage better fleet management & consumer behavior to be “green”
5. Do you think TomTom’s shift to value-added services and making Personal Navigation Devices a smaller portion of total revenue will be enough to sustain it in the near future? Is this strategy consistent with the needs of markets outside North America and Europe?
This is a difficult question. Certainly the move to reduce the company’s reliance on PNDs, a product category with declining sales, prices, and margins seemed a prudent measure. The efficacy of this strategy will depend on at least two key questions.
ν How fast will the PND market continue to shift to cell phones? If the analysts are correct and the cell phones will dominate the delivery for personal navigation devices then TomTom may need to accelerate its plans to reduce its dependency on this category. Students should recognize that as the demand for stand-alone PNDs declines the price will drop even more precipitously.
ν How fast can TomTom grow its non-PND business lines?
One bright potential bright spot for TomTom could be the demand for more partnerships with car makers. Car makers will likely offer navigational devices as standard features rather than luxury options. TomTom could be well positioned (if it chooses to do so) to garner a share of this market similar to its deal announced at the end of 2008 with Renault. Of course, the car makers would continue the downward price pressure, but would represent a sizable market opportunity.
Of course, should legislation be introduced to ban navigational devices in automobiles this would have a profound effect on TomTom and its competitors. Some students will be quick to point out that the markets in China and India would be lagging the U.S. and Europe and would therefore be ripe for market penetration without any significant outlay for new product development. However, better students will point out that China and India both have significant cell phone penetration and they may actually be more desirous of product integration and multi-bfunctionality.
6. What recommendations would you make to TomTom management to improve its competitive position in the satellite navigation industry, take advantage of market opportunities, and defend against external threats?
First, there appears to be no “magic bullet” capable of taking a strong #2 player such as TomTom to number one in the industry unless Garmin were to make a major misstep. The diffi culty of making a recommendation is further exacerbated by the move to cell phones for PNDs. However, TomTom might consider some of the following actions.
ν Focus on information solutions, specifically the “Better Routing” & “Better Traffic” information goals mentioned in the case. Provide these solutions regardless of type of device. ν Defend and Develop markets not dependent on cell phone devices (e.g. coast guard, maritime, aviation, and fleet management markets.) ν Seek more automotive partnerships – use the Renault and Avis experiences to ramp up sales in this area. ν Extend product life – attempt to recoup R&D efforts by seeking markets in developing countries where the disposable income may be reaching the threshold to adopt PNDs. ν Aggressively market fleet management solutions.
ν Develop more applications/partnerships similar to the iPhone experience. Find a way to “ride the dragon.” Find a way to participate in the growth in multifunctional cell phones. Even a small portion of this huge market would be extremely lucrative.
Immediately following Google’s October 28, 2009 announcement mentioned at the end of the case, TomTom and Garmin offered Black Friday discounts of 25% up to 40% on some units. In 2010, the company generated sales of €1.521 billion with a net income of €108 million. TomTom announced in a February 25, 2011 Reuters report by Roberta B. Cowan that it faces “such a rapid decline in its key market for personal navigation devices (PNDs) that its shift into new businesses may not be fast enough to compensate.” The company forecasted that the overall PND market would decline by 10 to 15 percent in 2011 and that its earnings would not grow.