Case Study - Samsung Innovation Strategy – Struggling to innovate, shifting focus to software

Samsung market cap has fallen by over US$ 6 billion recently as the company struggles to innovate new products which the company had been doing successfully for past many years. Samsung Electronics' chairman, Lee Kun-hee decades ago called Samsung management to "change everything except for your wife and children” which led to company not exactly innovating but copying and then tweaking the innovations of others, producing alternatives in the market and add-ons for software rather than developing useful, original features for consumers itself. Its strengths lie in its ability to quickly and cheaply research, develop, and manufacture hardware in an amazing broad range of product categories, but company has trouble in software development for its hardware. Despite the enormous amounts of money Samsung spends each year on research and development, Samsung is struggling to innovate which is having a significant effect on company’s revenues and brand image. Lee said Samsung must "get rid of business models and strategies from five, ten years ago and hardware-focused ways and wants the company's massive research and development centers to "work around the clock, non-stop." A report released by leading global consulting firm Booz and Company highlighted the fact despite Samsung spending US$10.4 billion  on R&D in the fiscal year ended June 2013, that included spend of all business divisions including mobile. Forecast for current year is to surpass $11 billion, and around $10 million or so is said to have been spent on developing Samsung’s flagship smartphone model.

Despite the heavy spending, Samsung ranks third as the world’s most innovative companies, following Apple and Google with Apple being major competitor in smartphones and Google a big software partner as Android is owned by Google and it is operating system for most of the Samsung mobiles. Samsung companies had successfully changed their strategy earlier as they made transition from volume focus to quality focus in the past two decades and they must now transition to upgrade the value and "class" of the products and services they provide to consumers. Samsung chairman pointed out that greater opportunities exist when companies and economies slow down and the conglomerate needs to look beyond competition and innovate new technologies and enter new markets which can only be achieved through convergence of industries and technologies. "There is a great need to build up competitiveness that cannot be copied by rivals. Old strategies, hardware-oriented processes and corporate cultures should be boldly thrown away," the chairman emphasized. Samsung can only overcome uncertainties only through initiatives that will lead to market and technological breakthroughs. Samsung also needs to complete the setting up of a global management system that can fuel change and innovation, he said. Samsung is the world's largest mobile device, television and semiconductor producer, but developing software  is critical for the company to compete with firms such as Apple and Google -- both of which have made a number of acquisitions to improve the software they offer. Samsung CFO Lee Sang Hoon said in November, 2013 that the company will aggressively search to secure valuable startups and SMBs that could improve its own products.

Blue Ocean Strategy @ Samsung – Galaxy Note Series created Phablet Segment

Samsung has adopted successfully Blue Ocean Strategy and company has profited through this strategy in the past few years. Samsung has invested heavily in Research & Development that helps the company to innovate and create new products that helped the company to grow into a Global powerhouse. Samsung’s team of researchers and engineers include over 50,000 employees across 42 global research facilities—each one collaborating on strategic technologies to forge new market trends and set new standards of excellence. Blue Ocean Strategy visions the creation of uncontested markets with no competition through new product innovation leading to creation of new demand. Samsung Galaxy Note Series of phablets highlights the Blue Ocean Strategy of Samsung that created an uncontested phablet market and dominates it with its Galaxy Note II and Galaxy Note III with Galaxy Gear smart watch. Market Research Firm IHS reported that 25.6 million phablet devices were sold in 2012 and estimated that these figures would grow to 60.4 million in 2013, and 146 million by 2016. Wikipedia definition of Phablet, is a smartphone form factor describing tablets with a screen over 6.5 inches in size and has normal phone calling functions ,designed to combine or straddle the functionalities of a smartphone and tablet, eliminating the need for two devices. As of October 2013, Samsung has sold over 40 million Galaxy Note devices over the past two years. 30 million were of the Note II, while the Note (Original) sold around 10 million.

Value innovation is at the heart of blue ocean strategy. Value Innovation is defined as creating value for both the buyer and the company and the innovation (in product, service, or delivery) should be such that it raises and create value for the market and company and at the same time reduces or eliminates features or services that are less valued by the current or future customers. Samsung Galaxy Note phablet is a classic example of value innovation where it eliminates the need for two devices smartphones and tablets, raises the product utility through big screen that enhances the browsing and multimedia experience and Stylus that facilitates sketching, note-taking and annotation. In its latest Galaxy Note 3 Samsung added a smart watch Galaxy Gear that adds even more functionality. Stylus reduces the need for carrying the notebooks or papers for note taking during meetings and conferences. Galaxy Note phablets with accessories like stylus and Gear smart watch created a need for new applications which also allowed developers of apps to create innovative new apps that best suited for phablets. Samsung Galaxy Note phablet series created the phablet market that also encouraged its competitors like Sony, Lenovo, Nokia, Asus, Acer, etc. also enter the market with their own version of phablets. Competition has picked up in the phablet market but Samsung still dominates the market. Samsung Galaxy Note phablet series is focused on giving Apple Inc. a tough competition, as Apple dominates the smartphone market with iPhones and Tablet market with iPads. Samsung has been hugely successful with this strategy and is giving a tough competition for Apple and also launching timely upgraded versions of the phablet series and phablets are critical part of Samsung global mobile strategy. Phablet sales are slowly crossing the tablets and laptops sales in some markets like Asia as reported by IDC highlights that Samsung Blue Ocean Strategy is highly successful.    

Blue Ocean Strategy essential to survive in the Smartphone Market 2011 – Future Outlook 2015

Wikipedia defines a smartphone is a high-end mobile phone built on a mobile computing platform, with more advanced computing ability and connectivity than a contemporary feature phone. Smartphones are no longer high end devices as many mobile makers like Samsung, LG, HTC, etc are not only launching smartphones in mid range but also at the lower range. In India there are low end android smart phones being launched at Rs 5000. Smartphones at low end are being launched by mostly local players that are not as feature rich and functional as high end smartphones but they have the essential smartphone features. Many mobile makers across the globe want the mobile users move to the smartphones from the basic dumb phones as it increases the opportunity to earn more revenue, sell more apps and increase their margins. Wireless carriers will also have an opportunity to increase their revenues as mobile users use their phones for other value added services other than calls and messages. Wireless carriers and mobile phone makers are collaborating to push more smartphones at all price points from Low end to high end. Subsidies are being provided by the wireless carriers to the mobile phone users in selling the devices and handsets and they intend to recover the subsidies through data plans and other value added services.

Apple, Samsung & HTC drive growth, RIM’s Blackberry crumbling in 2011 and Nokia Fighting back

Smartphone market had seen tremendous growth in 2010 (74% YoY) powered by iPhones, Blackberry and Android phones. The market was flooded by Samsung, HTC, Apple and RIM. But 2011 has been a slow growth year with around 35-40% YoY growth due to European Debt crisis and US Economic slowdown. Apple is the star performer with its iPhone and had been hugely successful as evident in the unit shipments and since its launch in 2007 there are five versions of iPhone that consumers appreciated and bought and Apple sold more than 150 million units till now. Apple iPhone has redefined the smartphone market and created uncontested market with new benchmarks that all the other smartphone vendors are still trying to reach. Every thing from the product design, software, hardware and even the Applications store has 500,000 apps have made iPhone a iconic cult product that consumers are willing to pay premium and even today Apple with its single product and total control on everything from Hardware, software and apps store is selling in millions. Apple along with iPhone and iTunes store through which music, videos, etc are sold has created a cult of users and since it reduced 3GS price to zero with contract, millions of new customers will buy iPhones. Apple is constantly innovating and improving the iPhone experience with addition of new features and new Siri the voice control Assistant is the new blue ocean offering.

Samsung is the next best performer in the smartphone that has sold more than 100 million units till now. Samsung is using a multi pronged approach launching smartphones on Android (Galaxy), Windows mobile (Omnia), Symbian and its own operating system Bada (Wave). Samsung launched smartphones with powerful chips, cameras, added features and functionality and android phones are supported by Android Market which has close to 500,000 apps. Samsung strategy has been very successful and it has given market dominance at least for one quarter. Samsung is using both the blue ocean strategy of targeting emerging market with its own mid range phones using Bada platform and swimming in the high end Red ocean market of smartphones with Android and Windows mobile phones. Samsung is also working with wireless carriers across the globe to push its smartphones into the market. Wireless carriers need Samsung to counter the iPhone. HTC is another vendor that has been flooding the market with windows and android phones. It released around 80 phones in 2011 based on various OS and is following Samsung and believes volumes will help it increase its market presence as is evident from its obscure position in 2007 to number 4 in smartphone market in 2011. HTC is suffering due to lack of a brand phone like iPhone or Samsung Galaxy and HTC recently announced a change in strategy from quantity to quality. It is planning to invest in brand and looking to offer more mid range phones in emerging markets along with high end. HTC adopted Red ocean strategy to survive in the smartphone market.

RIM’s Blackberry was a blue ocean product initially as it created uncontested market space in enterprise segment. Blackberry is a device which was a new type of wireless handheld solution for companies that saved time and money because employees can access email almost from any place at any time without having to go back to the office and is an example of the third principle of Blue Ocean Strategy: Reaching beyond existing demand. It became a must have device for all the C level executives, Top Managers, Political Leaders, Professionals, etc across the organizations and sold millions. As the consumer needs changed RIM also introduced new Blackberrys and launched various versions of the base models. But since the launch of Android into the market Blackberry started crumbling under the pressure and it has lost significant market share to Android. Blackberry once cult devices had seen its consumers move away due to lack of features, functionality like poor web browser, poor media player and not enough apps when compared to competitors. RIM is not able to compete in the Red ocean market, co-CEOs were initially skeptical about touch screen multimedia phones and later forced to launch such phones by wireless carriers and it no longer has its blue ocean advantage as consumers want multimedia internet phones not just email and messaging phones. RIM co-CEOs are promising revival of the product and are betting heavily on the QNX operating system and Blackberry 10 phones next year and are asking for patience from investors and stakeholders. For the time being it is planning to invest in the marketing and advertising campaigns for Blackberry 7 phones and looking for wireless carriers to push more phones till next year.

Nokia communicator line that was launched in 1996 was first smartphone and in 2000 the communicator line was enhanced with color screen and Symbian OS. The communicator line was a very expensive model and Nokia followed this with N series and launched the N95 in 2007 with range of multimedia features like 3G, 5 megapixel camera, etc. Symbian was the number one smartphone platform by market share from 1996 until 2011 when it dropped to second place behind Google's Android OS. Since the launch of iPhone and Android, Nokia rapidly lost market share in 2010 and N8, the touch screen smartphone with 12 megapixel camera and with video conferencing facility could not match its competitors. Nokia was forced to announce a dramatic new strategy in February 2011 that it will adopt Windows Phone 7 OS as its primary smartphone strategy along with its own Symbian OS platform. Nokia is working with Microsoft and is betting big the Windows Phone 7 OS and it launched Lumia at the end of the year. It also launched new Symbian phones supporting with the new OS update and is also launching the new N9 phone next year. Nokia is also committed to the Qt framework is at the core of Nokia's existing smartphone product line and Ovi Store consumers are downloading an increasing number of Qt applications. There is a place for third ecosystem in the Smartphone market and Nokia is betting that Windows Phone OS will be that and it is coordinating with Microsoft in terms of R&D and innovation. But both Nokia and Microsoft are facing the latecomer’s dilemma and they believe differentiation is the key like the one in Lumia phones large touch screen tiles rather than the grid of icons in iPhones and Android phones. But stakeholders are skeptical about the Nokia’s new strategy and look at this as a mere survival strategy not as a turnaround strategy.

Smartphone Market - Future Outlook 2015

According to IHS iSuppli Mobile Handset Market Tracker, global smartphone unit shipments will soar to 1.03 billion units in 2015, more than double the 478 million in 2011. This will cause smartphones’ share of global cell phone shipments to increase to 54.4 percent in 2015, up from 32.5 percent in 2011 Driven by booming sales of low-end models, shipments of smartphone will rise to account for more than half of the worldwide cell phone market. According to IDC, in 2011 vendors will ship about 472 million smartphones, about 55% above the 305 million shipped globally in 2010. IDC said 982 million smartphones will ship in 2015. IDC also forecasts Android phones will be market leader with nearly 44% of the global smartphone market in 2015, up from 39% in 2011. Windows Phone is expected to be in second place with a 20% share, growing from less than 4% in 2011. Apple iOS used in the iPhone will be in third with nearly 17% market share, down from 18% in 2011 and BlackBerry will be fourth in 2015 at 13%, down from 14% in 2011. Gartner and IDC endorse the Nokia and Microsoft collaboration strategy. Gartner too forecast a billion smartphones in 2015 and Android (49%), Microsoft (19.5%), Apple iOS (17.2%) and Blackberry (11%) will be the market shares. Both Gartner and IDC forecast drop in market share for Apple iOS as they believe Apple will be interested in maintaining margins rather than pursuing market share. The future will be dominated by open source OS market where the developers will be looking to develop Apps that can work on all the ecosystems irrespective the vendors and devices. The market will be fueled by falling average selling price, increased phone functionality and features, more applications in app stores, low priced data plans and manufacturers flooding the market with both the high end, mid end and low end smartphones at all the price points.

Discussion points:

1. What is the role of Blue Ocean Strategy in Smartphone market?
2. What is the role of innovation in the smartphone market and how do manufacturers keep on innovating?
3. What should manufacturers do keep up their market share and how will RIM and Nokia regain their market share?