Advancement Team 5: Yu Ting Tseng, Evren Ycel, Aslanbek Amrin, Nick Timmons, Altar Arpaci

BUSINESS REPORT

A. Executive Summary From its relatively humble beginnings as a PDA manufacturer for Compaq Computer, HTC Corporation has become a world level smart phone company and is known for its innovation and research. HTC started business as a manufacturer of PDAs for Compaq Computer. It operates two distinct segments; an ODM business for branded handset companies, and a mobile operator business for service providers. Their approach, which has met with great success in terms of differentiation (and hence, margins), is essentially to iterate successive product generations very quickly, along with providing a highly customizable platform. Most basically, we have manufacturing speed and product adaptability. But, that isnt enough. Up until 2006, HTC was a fantastic middleman. And though they had it good at the time, HTCs top management team knew that the only way to survive in the longest run, and deliver on their vision of being the best company in Taiwan, would be to change. After all, as the CEO said: If you really want to capture the value of innovation, you must have a brand identity. So, in 2006, HTC embarked on building its own brand and releasing phones under its own flag. The risks were great, as one only has to look at the likes of Acer and BenQ to see how disastrous such a decision could be. By taking advantage of the announcement of Apples first iPhone, HTC entered the Touch screen smart phone successfully. In Q2 2010, HTC became one of the top 10 mobile phone companies (feature and smartphone inclusive), selling 5.9 million units with a total market share of 1.8% (Gartner Newsroom, 2010a). On the other hand, due to fierce competition in all things mobile, and the rapid pace of technological change in the industry, HTC is facing several problems which need to be solved. First, compared to its competitors like Apple, and Blackberry, Nokia, Samsung and Sony Ericson, HTCs brand awareness is low. Exhibit 1 shows the market share of smart phone industry as of Feb. 2012. HTC has a 10.8% share, much less than Samsung and Apple, which means it will be hard to push that smartphone share up with stronger brand awareness. Also, compared to other smart phone manufactures, HTCs market share in Q4 2011 declined (See Exhibit 2), so there are some worrying fault lines in play. Second, HTC doesnt have its own operating system, so it needs to rely on Googles Android system and Microsoft Mobile. Third, in order to take more market share, HTC needs to expand U.S market, but it is controlled
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Advancement Team 5: Yu Ting Tseng, Evren Ycel, Aslanbek Amrin, Nick Timmons, Altar Arpaci

by operators like AT&T, T-Mobile, and Verizon and there are a lot of competing standards, unlike in Europe. Moreover, HTCs production cost is high because of customization, royalties and licensing fees, etc. And lastly, w.r.t. those fees, HTC pays out a great deal of money to gain access to technology to put in their products, and that is really a long term strategic handcuff. We think that a few things would go a long way towards mitigating, or even solving the aforementioned difficulties. We suggest that HTC should maintain and build cooperation with U.S. mobile operators to assist in their expansion to the US market. The Road to Brand also goes through China, which is the place that can most effectively bring HTC the quick scale it needs to compete well under its own title. We also think that HTC should work on retaining the IP rights of the phones that it designs for mobile operators, so it can sell the same phones to other markets, such as Europe, which is another way to bring scale to their business. Also, HTC should utilize its innovation culture and innovation speed to create a powerful brand identity. HTC should focus on innovating the next generation of smart phones, such as those with flexible screens. By introducing the next generation of smart phones, HTC could exploit the first mover advantage, and the brand bump that comes with getting into a new space first, which engenders brand loyalty and technological leadership. Outsourcing some of the value chain activities such as service, marketing and outbound logistics (where HTC is not relatively powerful) is another option for HTC, so that it can better focus on its core competencies. By using an ambidextrous organization structure and creating some heavy weight teams, the R&D activities can strengthen the core capabilities of HTC and improve their innovation process still further. Lastly, HTC is going to have to make huge efforts to enter the Asia and ROW markets, where the market share of the HTC is relatively low. B. Analysis Five Force Analysis for Smart Phone Industry With Porters Five Forces, what we are trying to do in practice is assess HTCs specific external environment, as well as industry attractiveness. Typically, this analysis is done through either the former or the latter perspective. What we prefer, instead of using an either/or approach, is to look at it both ways, with a slant towards the specific external. The reason is because you can break up the mobile manufacturing industry into many subindustries, but they will nonetheless retain a similar character and shape w.r.t. the main industry.
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Advancement Team 5: Yu Ting Tseng, Evren Ycel, Aslanbek Amrin, Nick Timmons, Altar Arpaci

The Degree of Existing Rivalry: HIGH The first of Porters Five Forces is the degree of existing rivalry, or basically a description of the incumbents

in the market space. The relative strength or weakness of this first force depends on the number and relative size of competitors playing in the industry, and the more firms competing that are of comparable size, the more competitive the industry will be, as well. And if you can get enough big players controlling the market, and trying to differentiate on price, then competition will become fierce and cutthroat. From Exhibit 1 in the case, we find that the market is divided by several big cell phone companies and there are two companies, Samsung and Apple taking almost half of market share. Also, what we see with HTCs market space is the fact that demand is increasing at such a significant clip, especially in places like China, definitely mitigates competitive pressures somewhat. Even so, this is a highly competitive, well-formed space, though that is not quite as true for the smartphone segment HTC wants to keep building in, as it is for the feature phone segment. Threat of Potential Entrants: LOW This force is based in a very interesting economic logic, and is ultimately relatively low, though pressures upward do exist. In a typical industry, when demand is increasing, new firms will continue to come into the space until marginal profit from selling more widgets equals marginal cost of making them. So, when demand is still increasing, this provides a kind of protection from meeting that point of equality. That is to say, there is more money still to be made, which attracts new players. That should be the dominant logic in this case, but there is something more important here: high barriers to entry. It costs an incredible amount of infrastructure, human capital, institutional knowledge, etc. to be able to operate a nationwide mobile network, or build a million smartphones. So, while there is plenty of money to be made, the extraordinary cost of entry into mobile hardware manufacturing is extremely prohibitive. Hence, this threat is low. However, the caveat is that this threat is much higher is super growth markets like China, so HTC must be more cognizant of this as it continues to infiltrate there. Bargaining Power of Suppliers: MEDIUM This force refers to the extent that firms rely on one or a few suppliers, which then affects the negotiating balance of supply contracts. In our present context, this can be looked at in two ways. First, HTC itself is a supplier, both to companies like Nokia in its ODM business, and companies like Verizon, with its mobile operator business.
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Advancement Team 5: Yu Ting Tseng, Evren Ycel, Aslanbek Amrin, Nick Timmons, Altar Arpaci

There is a pretty big hint of oligopoly at this level of the supply chain; companies like Foxconn and HTC dominate here. So, they are price makers with respect to their suppliers, to a pretty solid extent, which is a pretty solid position for white-labeling firms to be in. However, if we look at it from a level below in the supply chain, there are a ton of competitors who supply small components to companies like HTC. This lessens switching costs. The fact that bargaining power in this industry takes a very pyramidal shape is good for companies like HTC, whether they are white-labeling or moving up a level to sell under their own brand, and bad for suppliers further on down the chain. And, especially in HTCs case, they have a particular ability to vertically integrate that further insulates them from competitive pressure due to this force. However, this force is medium, because no matter where HTC goes for its components they will have to pay for the patent protection, since they dont have a lot of IP. Bargaining Power of Buyers: HIGH Within the mobile phone industry, there are a lot of players, with the numbers ever larger at each level down in the industry supply chain. In HTCs case, what is good from the supply side force, is a big competitive pressure on the demand/buying side. HTC has more or less built its business on the back of its success making things for the Windows Mobile platform, and its leadership position here is threatened significantly. Whereas they once had of that market, they are expected to see that cut to 30% within a short time. Even so, HTC still does more than half of its revenue on the Microsoft platform; they are still quite beholden to the Microsoft Specification demands, which are typically rather stringent. This gives Microsoft a lot of power, and puts HTC in a weak position. This is the fundamental reason why being a middle man is risky, and why HTC is doing well to build their own brand. That in and of itself is risky, but its certainly less so than slowly getting eaten away by the sheer strength of this force. Threat of Substitutes: HIGH Within this last force, analysts have to look outside the industry itself, to discover if there are products or services that fulfill a strategically equivalent role for customer. In this case, the threat is very high. Just as we saw above, there is a kind of funnel with gradations of competitive threat due to substitutes. Basic phone manufacturers are under threat from feature phones, and those in turn are under threat from smartphones. Beyond phones though, there are entirely new categories being created that compete with the idea of mobile telephony, like that of tablets or even tablet/phone amalgams like the Dell Streak. People are less likely to buy the HTC Evo 4G when there are other
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Advancement Team 5: Yu Ting Tseng, Evren Ycel, Aslanbek Amrin, Nick Timmons, Altar Arpaci

form factors that can achieve the same kind of mobility in a different way. And then with complementary goods like Skype, even those form factors can operate in the same way that mobile telephony devices do. Plus, the mobile industry as a whole is very innovative, and so the threat to HTC of competitive disruption is always there; Say, from flexible circuits that allow for devices to be rolled up and put into pockets. When we take the five forces together, it is rather obvious to conclude that both the mobile industry as a whole, and its manufacturing constituent, are extremely competitive landscapes. Even forces that are low, like the threat of new entrants, have upward pressure. Given all of this, it seems obvious that the counterintuitive step to build brand and stop white-labeling, was, and is, the correct way to go. Value Chain Analysis (See Exhibit 3) When we undertook a value chain analysis, we see that R&D, design capabilities and well developed outbound logistic are core competencies. These three major activities are giving to HTC a sustainable competitive advantage built on speed and flexibility. HTC needs to further leverage with their future strategic intent. R&D and Design-based sustainable competitive advantage is rare on the market, especially in such a fiercely competitive industry, as we saw above. We think that HTC has the talent and ability to adopt itself to the market demand. Adaptability, speed, design competency; these are difficult to imitate and provide a ripe platform for differentiation. HTC has well-developed outbound partnership with suppliers, content developers and operators which could be considered as a sustainable competitive advantage. However, the advantage of from their logistics set up, for example, partnership with OS providers Google, Microsoft and Nokia, is relationally based, and can be lost easily. Finally, the combination of resource, R&D, and design skills should be considered by HTC as core competency which giving them speed on the market. But HTC needs to think very hard about developing logistics as a stronger competency for the ultimate benefit for the end-users of HTC products. SWOT Analysis (See Exhibit 4) In order to understand HTCs position in the market, we used a SWOT analysis to analyze the internal strength and weakness, and nature of the external opportunity for HTC in the smart phone industry.. Strength HTC used to be the leading maker of PDAs, which rocketed HTCs intra-industry brand name image about in
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Advancement Team 5: Yu Ting Tseng, Evren Ycel, Aslanbek Amrin, Nick Timmons, Altar Arpaci

a short time. HTC is renowned for a strong innovation focus on research and development because the current CEO is famous for engineering and innovation. Due to its extensive experience with network suppliers, HTC is good at customizing mobile phones according to their specs. Therefore, HTC has built up a good relationship with many U.S. operators. HTC also good partner relations with OS companies such as Google and Microsoft, which let HTC enter the market with less risk. Furthermore, in order to gain the capability of customization, HTC has a strong set up for taking developed and taking it to commercialized innovation. Weaknesses As its weakness, if we compare HTC to other well-known mobile phone companies such as Nokia, Blackberry, Apple etc., HTC is a really new brand, and not terribly familiar to customers. They have come a long way since their founding, but when compared to the big players they are small. They did 4.65 billion in 2008. From Exhibit 6 in case, it showed that the other players, such Nokia generated 50.71 billion, 32.48 billion for Apple, and 121.29 billion for Samsung. Another weakness is that the manufacture cost of HTC is relatively high. This leads to the slimmer margins, which can have a domino effect. Other weaknesses that might hurt destabilize HTC is the nature of the high cost of customization, lack of patents, and lack of a self-owned operation system. A core strength of HTCs it is ability to commercialize innovation, yet that requires core IP that need to source externally. This is a huge problem for cost and flexibility. Opportunities A major opportunity for HTC is in Touch Screen Cell Phones which is the trend for mobile phone users. Since smart phone category will seize 30% of the whole phone market by the end of 2012, this offers HTC a chance to cultivate market share by riding the trend, it is easier to compete and build brand when there is a rising tide helping to lift all boats. Googles Android system is also significant, as it presents a chance to grow scale and share, as well as cut down on its overreliance in building for Windows Mobile. Moreover, 3G technology is booming at the moment, which is what HTC has focused itself on as of late. Threats Maybe the biggest threat the company faces in their Road to Brand. If they execute poorly, it will really hurt them competitively. Also, there are a great many strong competitors within the smart phone industry who are much
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Advancement Team 5: Yu Ting Tseng, Evren Ycel, Aslanbek Amrin, Nick Timmons, Altar Arpaci

larger with much more extensive histories of innovation. Ever shortening product development cycles pose a threat. And the high price point of HTC products, making for difficulty in to penetrating newer markets, combines with the others to pressure margins. And this pressure is only exacerbated by rising IP costs. C. Recommendations From those analyses we undertook above, R&D, design capabilities and well developed outbound logistic are core competences of HTC. And the most critical issues for HTC are the existence strong competitors, their low brand identity, high substitute threat, and the high bargaining power of buyers, in addition to their higher production costs from customization. Even with those issues, HTCs innovation traits, good R&D capability, and strong relationships with operators and OS companies can help them win in this industry. Below are our recommended strategies from each perspective. Strategy for cooperation with service providers HTC should continue to collaborate with mobile operators where HTC designs phones for service providers. This business provides better margins and differentiates HTC from other ODMs. Besides, operators own branded phone sales grew up to 10 percent of global handset sales and it is expected to grow up to 14 % by 2015. On the other hand, operators usually want HTC to design customized phones, and because of this, the R&D and IP borrowing costs of HTC increase, whereas using common components for different phones reduces them. For this segment, HTC could own the IP rights of these phones that it designs for mobile operators and sell the same phones to other markets, such as Europe, where the phones are unlocked and customers are free to choose the network through which they want to communicate. Selling the same phones to different markets will increase the economies of scale and lead HTC to decrease its costs. In this business, mobile operators have a chance to easily change their ODM supplier. The risk of the middle man is pretty much akin to death by a thousand cuts. The only real way for HTC to sustain its growth speed, and become synonymous with Taiwan as Samsung is with Korea or Sony is with Japan, is to create a powerful brand and sell its own branded products to end users directly. In the business segment where HTC manufactures smart phones for branded handset companies, it is not clear for HTC that it will be selected as the manufacturer of their next batch phones by branded handset companies. It is very probable for branded handset companies to switch to another manufacturer that has lower production costs. For
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Advancement Team 5: Yu Ting Tseng, Evren Ycel, Aslanbek Amrin, Nick Timmons, Altar Arpaci

the branded handset companies, their value add in this business is the innovation of the products, but not the production of them. Final customers are not interested in where the phones are manufactured but they are very interested in the brand and the features of the phones. So, only manufacturing phones to branded handset companies is not a sustainable profit formula for HTC in the long term. Strategy for improving brand identity As expressed in the SWOT analysis, one of the important strengths of HTC is its innovation culture and their speed in bringing a new product to market. At the same time, a critical problem for HTC is that it doesnt have one representative product to represent HTC. When the market mentions Apple, consumers immediately think iPhone, and when it talks about Samsung, consumers are reminded of the Galaxy, immediately. However, it is hard for consumers to name one specific product of HTC. Therefore, HTC should utilize its strengths to create a powerful brand identity. Rather than spending incredible sums on marketing and such to build awareness, HTC should put its focus on being a leader in the next generation smart phones, such as flexible phones. By introducing the next generation smart phones, HTC could exploit the first mover advantages, two of which are the brand loyalty and technological leadership being the first mover provides for. HTC could earn a long lasting reputation as the leader of the next generation smart phones. This reputation could help HTC to create a brand identity. On the other hand, HTC should keep in mind that if their first future tech phone fails and does not meet the customer requirements, it would be severely detrimental to their all-important brand building campaign. So HTC should learn the customer requirements through effective research methods to qualify the phones before introducing the market, and spend some extra time ensuring that wont put out a lemon with their first, first-mover product. Strategy for organization structure HTC should have an ambidextrous organization for their innovation of next generation phones. The department (R&D) responsible for inventing the next generation phones should have an organic structure that will have low levels of standardization and formalization. Teams in the R&D department should have the authority to take their own decision without being effected by the main stream products of HTC. On the other hand departments other than the R&D might be structured in a more rigid, typical, heirarchical structure where the standardization and formalization will be high. Bringing a larger degree of ambidexterity to HTC we think it vitally important if the
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Advancement Team 5: Yu Ting Tseng, Evren Ycel, Aslanbek Amrin, Nick Timmons, Altar Arpaci

company wants to be able to rely more on its own IP rather than paying large percentages to use the IP of others for their components. A particular challenge with this is communication between departments and so channels should be well established in order to ease the data flow between the departments. Strategy for collaboration HTC could outsource some of its value chain activities to other firms. As can be see from our Value Chain Analysis, HTC is not so powerful at service, marketing and out bound logistics. So HTC would so well to outsource these activities to other firms that could perform them more efficiently. By outsourcing, HTC could focus on the other value chain activities such as technology development and operations where it has more experience. But HTC should keep in mind that outsourcing these activities could cause HTC to forfeit important learning opportunities. By keeping in mind that a firm cannot employ every brilliant engineer in the world to innovate the next generation phones, HTC should apply an Open Innovation model to their business, and collaborate with external sources of innovation for the next generation phones. HTC could foster its innovation process with the external expertise and the probability for HTC to meet the customer needs could increase by applying the open innovation model. Again, as seen from the SWOT, innovation culture is one of the important strength of HTC, so the absorptive capacity of HTC is very high. Since the absorptive capacity of HTC is very high it could use the external sources to leverage its innovation capability in more efficient ways. Strategy for market expansion It is obvious from the exhibit 2 (Global Smart Phone sales in 2010 and 2011) that smart phones will be the main stream of the market in coming years. So HTC must attack the main stream of the market especially for the Asia and ROW market where the market share of the HTC is relatively low, and the total phone share of smartphones is also low. This is a double convergence that might allow HTC to really grow the scale of its operations to a level with the bigger players, and thus obtain leverage to mitigate some of the pressure from such strong market forces. Strategy for OS developers Among all operating systems listed in Exhibit 6 (surveys done by Gartner and Nielsen in 2011 and 2012, respectively) showed that the Android system has taken a very large part of the total market share, and Apples iOS is chasing behind. Within the rest of the OSs, Microsoft Mobile is the developer that HTC should also pay attention
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Advancement Team 5: Yu Ting Tseng, Evren Ycel, Aslanbek Amrin, Nick Timmons, Altar Arpaci

to because of the strong company background and developing potentials. Because of the high competition and maturity in the current OS market space, it is too late for HTC to develop its own operating system. Therefore, HTC should keep collaborating with Google and also cultivate the relationship with Microsoft for future products. Through the stronger partnerships, HTC can obtain the necessary capabilities of operating system development quickly, learn from other firms, and share the cost and risk. HTC does have a new software concept, called HTC Sense which is a mixture of Applications, add-ons, and services revolving around the Android OS on HTC devices. This could be a future treasured asset that HTC can use to differentiate from competitors. If HTC keeps building the HTC Sense function, that could be a huge potential payoff if its executed on properly. It will also be an advantage that they can use for negotiating with OS developer or service operators. Strategy for intellectual property Lastly, there is the lawsuit which HTC encountered last year. As we mentioned in SWOT analysis, the awareness of intellectual property rights is increasing. There were lawsuits between Apple and HTC last year about patent infringement, and Apple won the lawsuit. It is known that one of the HTCs biggest expenses is royalty payments and especially after the lawsuit, HTC will be under the microscope about patent infringements. This should present HTC with a renewed vigor and focus on developing its own technology especially about next generation phones and should apply for patent protection for its inventions. After holding patents about the next generation phones, similar to Nokia, royalties could be an important portion of HTCs earnings, rather than a major profit irritant.

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Advancement Team 5: Yu Ting Tseng, Evren Ycel, Aslanbek Amrin, Nick Timmons, Altar Arpaci Exhibit 1: Market share of Smartphone manufacturers in Feb, 2012

Exhibit 2 Market Share Change trend of Top Five Worldwide Smart Phone Vendors

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Advancement Team 5: Yu Ting Tseng, Evren Ycel, Aslanbek Amrin, Nick Timmons, Altar Arpaci Exhibit 3: Value Chain Analysis of HTC

Value-Chain Activity

Strengths Primary activities

Weaknesses

Inbound logistic

HTC is a contract manufacturer. Manufacturing chipset and pocked size PC.

Because HTC mostly consider as a contract manufacturer, it doesnt have experience on direct sale, marketing strategy and inventory management as well as units to do this job.

Established Magic lab

Operations

R&D and manufacturing process are working closely.

R&D and manufacturing process relationship required a quality control. Little connection with end-users. Depend from the OS platform.

Outbound logistic

HTC has good experience with suppliers. HTC has partnership with OS provider Google and Microsoft.

Contracting with Compaq. Partnership with QUALCOMM (3G), Connection with phones service providers T-Mobile, Vodafone, British telecom, Orange.

Marketing and sales

HTC

is

recognized

by

operators

and

Pricing strategy higher among competitors. Lack significant intellectual property rights in mobile phone

customers. Good relationship with operators is beneficial because HTC may quickly penetrate into the market. Customers who use HTC smartphone show good satisfaction. Customization phones is a strong support from operators Service Wide product line.

Dont have support service. For example: if customer has a device that is out of

warranty and wish to have it repaired or an HTC branded device that needs service, HTC have to connect and help to this customer Support activities Procurement HTS have to go to outside to obtain OS platform to his smartphone. HRM The HTC has the powerful R&D team and the most innovative design skill in the market. It can be seen from the market adoption and success from the selling of smartphones. 12 Dont have historical experiences building on their own OS platform. Luck of business management skills

especially sales force, marketing

Advancement Team 5: Yu Ting Tseng, Evren Ycel, Aslanbek Amrin, Nick Timmons, Altar Arpaci
Technology development Infrastructure Historical advantages. Powerful R&D. License on 3G. Design capabilities. Mobile phone industry required ecosystems where Content providers, Manufacturers and Operators are working together. This means that without this infrastructure HTC may have problem in future due to specializations. Rick of cost.

Because HTC is a manufacture, it gives focus to design and to produce smartphones well with strong research capability. It gives ability to move fast in the evolving mobile phone market.

Exhibit 4: SWOT Analysis

Strength
Leading maker of PDA smart phone Renowned for innovation Good at customizing mobile phone Good relationship with many U.S. operators and OS companies Strong set up of research and development

Weakness
Low brand awareness High manufacture cost Lack of capability of hardware and OS developing Product price is higher among competitors

HTC SWOT
Opportunity
Trend of Touch Screen Cell Phones Googles Android system users is increasing 3G technology is booming

Threat
Apples IPhone Strong competition within the smart phone industry Short product cycles of cell phone

Exhibit 5: Sales of Smart phone Market in 2011

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Advancement Team 5: Yu Ting Tseng, Evren Ycel, Aslanbek Amrin, Nick Timmons, Altar Arpaci

Exhibit 6: Market Share of Operating System for Smartphone

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