Developing a Winning China Strategy

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CONFIDENTIAL


Mobile Handset Competitor Analysis:
Nokia

                  SAMSUNG ELECTRONICS CHINA
                  (SEC China)




August 20, 2001
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OVERVIEW OF COMPETITOR ANALYSIS FRAMEWORK

         1. Background information           4. Value chain strategy
         • Location        • Starting year   Focus on
         • Registered      • Number of       • Marketing,
             capital          employees        advertising and
         • Management • Era analysis           promotion
             team                            • Distribution (channel
         • Equity                              and sales force)
             structure




         2. Strategy                         5. Organization and ownership
         •   Mission                         • Organization structure
         •   Vision                          • Ownership structure
         •   Corporate strategy
         •   Market position




         3. Product/market                   6. Financial performance
         •   Key product offerings           • Sales
         •   Key customers                   • Profit
         •   Value proposition
         •   Geographic focus
         •   Pricing



                                                                                                        1
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KEY ISSUES TO PROBE - NOKIA



                   • How does Nokia position itself now and in 2005?
     Strategy      • What are Nokia’s product and value delivery system strategies that
                     differentiate itself from its competitors?
                   • How does its current market position help achieve its goal?
                   • What is Nokia’s key product offerings and how does Nokia
  Product/market
                     differentiate its products from its competitors’?
                   • What customer segments is Nokia targeting at?
                   • In which geographic areas is Nokia strong or weak?
   Value chain     • How does Nokia’s product development meet customer
    strategy         requirement?
                   • How do Nokia’s distribution channels differ from its competitors’?
                   • Why does Nokia launch exclusive specialist shops?
  Organization &   • How does Nokia provide customer services?
    ownership      • How much does Nokia invest in JVs and WOFEs in China, and what
                     are the main drivers?
                   • How does Nokia organize to enable the JVs and WOFEs to work
    Financial        together?
   performance     • How strong is Nokia’s performance and what are the major
                     contributors?
                   • What is Nokia’s performance trend?

                                                                                                    2
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BACKGROUND INFORMATION

        1. Background information           4. Value chain strategy
        • Location        • Starting year   • Focus on
        • Registered      • Number of         – Marketing,
            capital          employees          advertising and
        • Management • Era analysis             promotion
            team                              – Distribution (channel
        • Equity                                and sales force)
            structure




        2. Strategy                         5. Organization and ownership
        •   Mission                         • Organization structure
        •   Vision                          • Ownership structure
        •   Corporate strategy
        •   Market position




        3. Product/market                   6. Financial performance
        •   Key product offerings           • Sales
        •   Key customers                   • Profit
        •   Value proposition
        •   Geographic focus
        •   Pricing



                                                                                                       3
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NOKIA IS RELATIVELY A LATE-COMER TO CHINA; HOWEVER
IT HAS GROWN RAPIDLY TO BECOME A MARKET LEADER IN
MOBILE COMMUNICATION
Background                                                                  Implication

 Location
               • Based at Finland, with offices in China, e.g. Beijing      • Leader in mobile communication
               • China is Nokia's strategic location because it is            globally and in China
                   Nokia's second largest market, second only to US
                                                                            • Al though a relatively later-
 Investment
               • Invested more than USD1.7 billion in China                   comer to China, has invested
                                                                              heavily in its Chinese business

 Business
               • Two main business units: Nokia network and Nokia           • Focused product lines with
                   mobile                                                     Nokia network offering mobile,
                                                                              broadband and IP network infra-
 Starting
               • First office in China in 1985, first JV in China in 1994     structure, and Nokia mobile
                                                                              offering mobile handsets

 Employees
               • 60,000 staff in 130 countries
               • More than 20 offices in China, 7 JVs, 1 WOFE and 1
                   R&D center with over 5500 staff

 History
               • Started business in China since 1950s
               • 1985 saw first office in Beijing, supplying fixed line
                   networks
               •   Supplied analog NMT 450 system and terminal in
                   1986
               •   Supplied transmission system, optical cable and
                   electric cables in later 1980s
               •   Supplied analog ETACS system and terminals in
                   1989
               •   Supplied GSM system and terminals in 1990s

Source: Nokia Press Release                                                                                          4
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STRATEGY

           1. Background information           4. Value chain strategy
           • Location        • Starting year   • Focus on
           • Registered      • Number of         – Marketing,
               capital          employees          advertising and
           • Management • Era analysis             promotion
               team                              – Distribution (channel
           • Equity                                and sales force)
               structure




           2. Strategy                         5. Organization and ownership
           •   Mission                         • Organization structure
           •   Vision                          • Ownership structure
           •   Corporate strategy
           •   Market position




           3. Product /market                  6. Financial performance
           •   Key product offerings           • Sales
           •   Key customers                   • Profit
           •   Value proposition
           •   Geographic focus
           •   Pricing



                                                                                                          5
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NOKIA POSITIONS ITSELF AS A LEADING PRODUCT AND SYSTEM
SUPPLIER IN THE FAST GROWING MOBILE COMMUNICATION INDUSTRY

                 Strategy
                 • Focuses on mobile communication
Product            products and aims to be a total solution
                   provider in mobile communication
                 • Regularly introduces consumer-
                   oriented products with emphasis on
                   designs and functions                      Vision
                                                              To lead mobile
                                                              communication through
                                                              the integration of mobility
Value            • Builds strong local alliance through JVs   with internet and the
delivery           with Chinese partners and R&D centers      innovation of new service
system             with Chinese universities                  models
                 • Builds exclusive specialist shops to
                   bring one-step solutions to end users
                 • Builds fixed and mobile service stations
                   with wide geographic coverage
                   including rural areas



Source: Nokia press Release
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NOKIA HAS CAUGHT UP WITH MOTOROLA AS MARKET LEADERS IN
MOBILE HANDSETS SINCE 1999
            Monthly market share development
            (Percent of market in units sold)
       40



                                                                    Nokia
       30                                                           Motorola




       20




       10
                                                                    Siemens
                                                                    Ericsson


        0
              98                 99             Jan ‘00   Dec ‘00

Source: IDC, McKinsey Analysis                                                                   7
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UNLIKE ITS COMPETITORS, NOKIA’S MARKET SHARE IS THE SAME
AMONGST NEW AND REPURCHASE BUYERS
Percent of units sold, 2000 4Q

                                                                          Definition:
                   Others                                                 • New buyer:never
                                    23           21            21           bought mobile phone
                                                                            before
                                                  7             7         • Repurchase buyer:
                   Ericsson          8                                      bought mobile phone
                                                 12            12           before
                                    10
                   Siemens

                                    28           29            29
                   Motorola



                   Nokia            31           31            31


                                 Repurchase   New Buyers   Total market
                                   Buyers
       % of Market                 25%           75%          100%


Source: IDC, McKinsey analysis                                                                          8
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AMONG REPURCHASERS, NOKIA’S CHURN RATE IS HIGH, BUT AT PAR
WITH MOTOROLA
Percent, 2000

                Brand bought by previous                    Brand bought by previous
                Nokia owners                                Motorola owners
                        Others                                       Others

                            10                           Alcatel         11                Nokia
          Alcatel                           Nokia
                    6                                                3                 26
  Siemens                               33
               6
                                                    Siemens 19
Samsung 6


                    15                                           3
                                                     Samsung
      Ericsson                                                       6            32
                                 24
                                                         Ericsson

                                 Motorola                                        Motorola




Source: McKinsey analysis                                                                                9
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PRODUCT/MARKET

        1. Background information           4. Value chain strategy
        • Location        • Starting year   • Focus on
        • Registered      • Number of         – Marketing,
            capital          employees          advertising and
        • Management • Era analysis             promotion
            team                              – Distribution (channel
        • Equity                                and sales force)
            structure




        2. Strategy                         5. Organization and ownership
        •   Mission                         • Organization structure
        •   Vision                          • Ownership structure
        •   Corporate strategy
        •   Market position




        3. Product /market                  6. Financial performance
        •   Key product offerings           • Sales
        •   Key customers                   • Profit
        •   Value proposition
        •   Geographic focus
        •   Pricing



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KEY MESSAGES - PRODUCT/MARKET



         • Nokia has a narrow product portfolio focusing on mobile
          communication products, and mobile handset is Nokia’s key
          product offering

         • Nokia offers consumer-oriented handsets with emphasis on
          designs and functions, targeting medium and low end customers.
          Its main customer segments are the young and fashionable

         • Nokia’s fashion phones are relatively strong in major cities and the
          south region; however Nokia is relatively weak in the fourth-tier
          cities




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MOBILE HANDSET IS NOKIA's BIGGEST PRODUCT OFFERING AND ITS
ESSENTIAL PART OF TOTAL SOLUTIONS IN MOBILE COMMUNICATION
                       Products                     Now and future
                       • Nokia 3310 for young       • Largest mobile handset supplier in the
            Nokia        people                       world with above average growth in sales
            mobile     • Nokia 8210 for fashion       and more than 30% global market share
            handsets     chaser                     • Views mobile handset as a digital
                       • Nokia 6210 WAP for           convergence point for multimedia services
                         business professional      • Supports blue tooth between mobile
                       • Nokia 7110 WAP with full     handset and PC in Nokia 6310 for mobile
                         Chinese interface            professional
Nokia                  • Nokia 9210 as personnel    • Develop WCDMA handsets with DoCoMo
product                  communicator               • Develops homenet products such as
offerings              • Nokia 8310, 6310 for         multimedia terminals in Nokia Zhongxin
                         GPRS and WAP



                       • Mobile network             • Provides multimedia service network
            Nokia      • Broadband network            solutions for operators and ISP entering
            network    • IP network                   the mobile communication fields
                                                    • Nokia network covers many cities and
                                                      areas in China including Beijing,
                                                      Shanghai, Hong Kong and Taiwan etc.
                                                    • Aims to be a total solution provider for
                                                      mobile communication


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NOKIA EMPHASIZES ON CONSUMER-ORIENTED DESIGNS AND FUNCTIONS
                               Fashion                 Classic                                Key Differences
                               8210         V998++     6210      P7689        L2000          L2000WWW
 Fashion
 • Changeable cover              
 • Sub-100g                                  
 Business
 •   Voice-dial                                                                               
 •   Recording                                                                                 
 •   Vibration                                                                                
 •   Tri-band                                                                                     
 •   WAP                                                                                        
 •   Built-in modem                                   
 •   IR-port                                                                                    
 Basic
                                                                                              
 • Chinese input
 • Li-Ion battery                                                                             
 • SMS messaging                                                                               
 Fun
                                                                
 • Games
 • Composable/ downloadable                                     
     ringer tone
 Price in China (RMB)           2652        2878       2369       1800           1435*             1452


                              Equivalent features,                    Motorola offers lower price
                              Nokia more fun/fashion                  models with similar features,
                              vs. Motorola more                       tri-band and WAP
* Nov. 2000 price             functions                                                                      13
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WITHIN CHINA, NOKIA's FASHION PHONES PERFORM BETTER IN SOUTH
CHINA AND LARGE CITIES
Percent, 2000
            Market share

                North region    4


                East region         5


                South region            7


                China average       5


                Beijing             5


                Shanghai                7


                Shenzhen                    8

                Guangzhou                   8

Source: McKinsey Analysis                                                14
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NOKIA IS RELATIVELY WEAK IN THE IMPORTANT 4TH TIER CITY MARKET
Percent market share, 2000



                        100%=        6.7      7.0       8.5     14.8    Million units

                        Others        21       25       24
                                                                 30

                      Ericsson        10       7         7
                      Siemens         10       9         9        7
                                                                 11

                     Motorola         28       29       30
                                                                 28



                            Nokia     31       30       30
                                                                 24


                                    Tier 1   Tier 2   Tier 3   Tier 4
     Tier size as % of total          18%      19%      23%     40%


Source: McKinsey Analysis                                                                      15
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AND THIS WEAKNESS IN 4TH TIER CITIES SPANS MOST PROVINCES
                                                               Tier 1/2/3 city
Percent market share, Nokia
                                                               Tier 4 city

               40%


               35%


               30%


               25%
Market share




               20%
Percent




               15%


               10%


               5%


               0%




                                          Province
Source: Retail Audit, McKinsey analysis                                      16
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VALUE CHAIN STRATEGY

         1. Background information           4. Value chain strategy
         • Location        • Starting year   • Focus on
         • Registered      • Number of         – Marketing,
             capital          employees          advertising and
         • Management • Era analysis             promotion
             team                              – Distribution (channel
         • Equity                                and sales force)
             structure




         2. Strategy                         5. Organization and ownership
         •   Mission                         • Organization structure
         •   Vision                          • Ownership structure
         •   Corporate strategy
         •   Market position




         3. Product/market                   6. Financial performance
         •   Key product offerings           • Sales
         •   Key customers                   • Profit
         •   Value proposition
         •   Geographic focus
         •   Pricing



                                                                                                    17
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KEY MESSAGES - VALUE CHAIN STRATEGY



    • Nokia is not regarded as a technology leader, as compared with Motorola;
     however, it spends a great amount of effort in understanding customer
     requirements and tailors its product to meet these requirements.

    • Nokia employs PTAC, CellStar, Beijing Telecommunication Equipment Factory,
     Bright Point, Express Fortune, and Tech Glory as the first-tier resellers to
     distribute handsets through authorized stores and counters. The distribution
     channels are relatively flat.

    • While its retail shops are growing rapidly to approximately 900 around the
     country, Nokia also develops exclusive specialist shops in order to provide “one-
     step” solutions to end users

    • Nokia implements a highly efficient customer service system with 250 service
     stations and mobile service stations for rural areas. It provides good pre- and
     after sales service




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NOKIA IS STRONG AT MARKETING, SALES AND SERVICE, BUT WEAK AT
TECHNOLOGY
                                   Manufac-        Marketing
                                                                      Sales and
              R&D                  turing and      and                                   Service
                                                                      distribution
                                   supply chain    branding


Strengths    • Established R&D • Scalable local • Strong brand    • Country-wide       • Highly efficient
               center in 98/99 in production     awareness and        distribution       customer service
               Beijing for China • Optimized     preference           channels and       system with 250
               market, with 150 logistics      • Promotes             strong channel     service stations
               research staff                    “technology based    management         and mobile
             • Strong in low end                 on people”       •   High retailers     service stations
               development                                            preference         for rural areas
             • Good product                                                            • Good pre- and
               quality and design                                                        after sales
                                                                                         service, e.g. “one
                                                                                         hour repair”
                                                                                         service

Levers for • Weaker position in                • Awareness and • Lower rating of
improvement high end segment                     preference lower retail support
             and high end                        than Motorola   • Retailer
             technology                        • Brand in young    preference not
           • Position in low end                 market under      translating into
             under attack                        attack            higher market
                                               • Low technology share
                                                 image
                                                                                                              19
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NOKIA HAS REPUTATION GAP AS TECHNOLOGY LEADER, AND TARGET
DIFFERENT CUSTOMER SEGMENTS FROM MOTOROLA
                  ….on Nokia             ……on Motorola




                                          Motorola always
….on technology     Nokia is second to    introduces new
leadership and      upgrade products     technology to the
innovation                                  market first




                       Nokia has
 ….on design          good product
                                          Motorola products
                                           are more formal
                        designs



 … on typical
 loyal users        Nokia phones
                                            Loyal user
                   are for female or
                                          is white-collar
                   younger people
                                              worker




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NOKIA DISTRIBUTES THROUGH SIX FIRST-TIER RESELLERS AND
DEVELOPS EXCLUSIVE SPECIALIST SHOPS
             Nokia Channel Structure

                                                   Rationales
                         Vendor
                      58%                          • Nokia employs PTAC, CellStar,
                                                    Beijing Telecommunication
        1st-tier resellers                          Equipment Factory, Bright Point,
                    33%          6%                 Express Fortune, and Tech
                                                    Glory as its 6 first-tier resellers
                2nd-tier resellers                 • Nokia requires resellers to
                            33%             36%     report the promotion plan and
                  22%                               product ordering plans a quarter
                   Retailers/retail chain stores    in advance, and since the
                                                    demand for handsets tends to
             3% 6%                    91%
                                                    fluctuate across promotional
                        Consumers                   programs, this inflexible strategy
                                                    generally limits the potential
                                                    gain when market demand
                                                    changes across promotions

        • Late entry to the China market           • Close to 900 retail shops and
          with less historic overhead               counters country-wide, with 50%
        • Flat distribution channels                growth from 1999
        • Develops exclusive specialist            • Form exclusive specialist shop
          shops                                     to provide one-step solution to
        • Provides after-sale services              end users
Source: China Computer Journal                                                                 21
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ORGANIZATION AND OWNERSHIP

         1. Background information           4. Value chain strategy
         • Location        • Starting year   • Focus on
         • Registered      • Number of         – Marketing,
             capital          employees          advertising and
         • Management • Era analysis             promotion
             team                              – Distribution (channel
         • Equity                                and sales force)
             structure




         2. Strategy                         5. Organization and ownership
         •   Mission                         • Organization structure
         •   Vision                          • Ownership structure
         •   Corporate strategy
         •   Market position




         3. Product /market                  6. Financial performance
         •   Key product offerings           • Sales
         •   Key customers                   • Profit
         •   Value proposition
         •   Geographic focus
         •   Pricing



                                                                                                    22
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KEY MESSAGES - ORGANIZATION AND OWNERSHIP



         • Nokia has 7JV and 1 WOFE in China, among which Nokia Beijing
          and Nokia Dongguan are manufacturing mobile handsets. Nokia
          Beijing has annual production capacity of 30 million units in 2001.

         • The main drivers for Nokia to setup JVs and WOFEs in China
          include building local alliances, localizing manufacturing to meet
          domestic market demand and increase exports, and technology
          transfer encouraged by the Chinese government

         • With a narrow product portfolio, Nokia’s organization is product
          focused with coordinated sales and marketing effort across JVs
          that manufacture the same products




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NOKIA HAS 7 JVs AND 1 WOFE IN CHINA, AMONG WHICH 2 JVs ARE
DEVOTED TO MOBILE HANDSETS


Main drivers                                                                         Nokia
• Builds successful                                                              international
    alliance with
    Chinese partners
•   Localizes manu-
    facturing for major
    products
•   Meets domestic
    market demand
    and increases
    exports                          50%              70%             With               With             With             With Zhongxin     100%
•   Realizes technology              with             With            Fujian             Beijing          Dongruan         and
    and skill transfer in            Shouxin          Dongguan        mobile             Hangxing                          broadcasting
    development,                                      Wanxin                                                               science institute
    manufacturing and
    management                  Nokia Beijing                     Nokia Fujian                                           Nokia
•   Helps Chinese                 mobile
                                                    Nokia
                                                                     mobile
                                                                                  Nokia Beijing,    Nokia Dongda
                                                                                                                       Zhongxin     Nokia Suzhou
                                                                                                                                                        Nokia
    partners improve                              Dongguan                         Hangxing            telecom                                        Chongqin
                                  commu-                         communication                                           digital      telecom
    competitiveness in                           mobile phone                       telecom          technology                                        telecom
                                  nication                         technology                                         technology
    China and globally




Established year                   1995             1995            1997             1994              2000             1999            1998




Product offering            • GSM               • Mobile         • GSM           • Mobile          • Wireless       • Digital      • GSM base
                                 system and       handsets        900/1800          switches         applications     multimedia      station
                                 equipment                        network                            solutions        terminals    • Cellular
                            •    Mobile                           services                           and services                     network
                                 handsets                                                                                             transmission
                                                                                                                                      products
                                                                                                                                                            24
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NOKIA's ORGANIZATION IS MAINLY PRODUCT FOCUSED WITH
A NARROW PRODUCT PORTFOLIO AND COORDINATED SALES
AND MARKETING
                                                                                           Nokia
                                                                                       international




            Nokia                                                    Nokia
                                   Nokia
            China                                   Nokia        Fujian mobile       Nokia                     Nokia                      Nokia
             Nokia                Beijing                                                                                                                Nokia Suzhou             Nokia
            office                                Dongguan        communic-          Beijing                  Dongda                    Zhongxin
             China                mobile                                                                                                                   telecom              Chongqin
                                                 mobile phone        ation          Hangxing                  telecom                     digital
             office              communi-                                                                                                                                        telecom
                                                                  technology        telecom                 technology                 technology
                                   cation




Marketing   Sales       Service



                       Manufa-       Sales and                                                               Impleme-      Sales and                Manufa-         Sales and
                                                                 R&D         Service            R&D
                       cturing       Services                                                                  tation      Services                 cturing         Services




                                                     Manu-                        Manufa-       Sales and                          Manufa-      Sales and
                                                    facturing                     cturing       Services                           cturing      Services




                    • GSM system and               • Mobile        • GSM                    • Mobile          • Wireless           • Digital                  • GSM base
                      equipment                       handsets         900/1800                switches          applications,         multimedia               station
                    • Mobile handsets                                  network                                   solutions             terminals              • Cellular
                                                                       services                                  and services                                   network
                                                                                                                                                                transmission
                                                                                                                                                                products
                                                                                                                                                                                    25
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FINANCIAL PERFORMANCE

         1. Background information           4. Value chain strategy
         • Location        • Starting year   • Focus on
         • Registered      • Number of         – Marketing,
             capital          employees          advertising and
         • Management • Era analysis             promotion
             team                              – Distribution (channel
         • Equity                                and sales force)
             structure




         2. Strategy                         5. Organization and ownership
         •   Mission                         • Organization structure
         •   Vision                          • Ownership structure
         •   Corporate strategy
         •   Market position




         3. Product/market                   6. Financial performance
         •   Key product offerings           • Sales
         •   Key customers                   • Profit
         •   Value proposition
         •   Geographic focus
         •   Pricing



                                                                                                    26
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KEY MESSAGES - FINANCIAL PERFORMANCE



     • Nokia’s sales in China grew 31% and its operating profit grew 26% in 2000,
      among which, mobile handsets contributed to 59% of the sales and 70% of
      the profit.

     • Mobile handset plays an increasingly important role in Nokia’s product
      portfolio, as it represents 59% of the sales in 2000 from 54% in 1999.

     • Nokia has secured an operating margin of 22% in mobile handsets, the
      highest margin in the mobile handset industry in China, due to highly efficient
      operations that keep the cost down to minimum, even though intensive
      competition has driven the operating margin down from 24% in 1999.




                                                                                                   27
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NOKIA SEES 30% GROWTH IN SALES AND OPERATING PROFIT WHERE
MOBILE HANDSETS CONTRIBUTE MORE THAN 50%
USD millions
Revenues in China                                            Operating profit in China

                       31%              2,697



                   2,052




                                       1,597                             26%

                  1,114                                                          512
                                                                  406
Mobile                                                Mobile
handsets                                                           262             356
                                                      handsets
                  1999                 2000                       1999           2000


Source: Nokia Press Release, IDC, McKinsey Analysis                                                     28

				
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