Competitive Dynamics in the Mobile Phone Industry

C. Giachetti

• Publisher: Palgrave Pivot
• Year: 2013
• Print ISBN: 9781349476725, 9781137373694
• eBook ISBN: 9781137374127
• Topic: Business
• Subtopic: Business Strategy
• Index: Business

This book explores which kind of competitive moves and countermoves have been taken by mobile phone vendors like Nokia, Samsung, Motorola and Apple, as well as emerging rivals from developing countries, to defend their competitive position over the industry life cycle, and which factors have driven these actions.

Part 1

Competitive Dynamics

1

Competitive Dynamics Research

Abstract: This chapter, after have defined “competitive dynamics”, presents the main tools proposed by scholars in the field of competitive dynamics for “competitor identification”, whose objective is to understand who the firm’s competitors are and in particular those that are more likely to threaten its competitive position in the industry. This is followed by a review of some of the main tools proposed by strategy scholars to analyze the intensity of competition within an industry. The chapter closes with an overview of studies on “competitive aggressiveness” and “imitation and differentiation dynamics”.

Keywords: competitive aggressiveness; competitive dynamics; competitive intensity; competitor identification

Giachetti, Claudio. Competitive Dynamics in the Mobile Phone Industry. Basingstoke: Palgrave Macmillan, 2013. DOI: 10.1057/9781137374127.

1.1 What is competitive dynamics?

A sequence of attacks and reactions among firms in an industry creates competitive dynamics. These competitive actions reflect the firm’s intent to generate superior performance with respect to industry rivals (MacMillan, McCaffrey and Van Wijk, 1985). Successful actions, namely those actions which increase the firm’s performance, trigger a reaction by competitors, which may attempt to block or imitate the firm’s actions, and in turn affect its search for a competitive advantage. The study of competitive dynamics is thus the analysis of how the firm’s actions affect competitors’ reactions and performance (Smith, Ferrier and Ndofor, 2006).

An example of competitive dynamics is the eternal battle between Coca-Cola (Coke) and Pepsi-Cola (Pepsi) (D’Aveni, 1994; Ghemawat, 1991). The two American multinational beverage corporations began to fight at the beginning of the last century. The soft drink market was initially dominated by Coke. During the 1930s and 1940s, Pepsi initiated an aggressive price competition against Coke by strongly reducing the prices of all its cola drinks. Coke did not respond with a price reduction, and this helped Pepsi reduce its market share gap with respect to Coke. In the 1950s, Pepsi invested a lot in advertising. This helped the firm to continue to gain shares, but dramatically damaged its profitability. In the 1960s, both players started to lengthen their product line, introducing new soft drinks to give a larger variety of product choices to the heterogeneous consumer segments. At the beginning of the 1970s, Pepsi began to attack Coke with a series of advertising campaigns. At first it introduced the Pepsi Challenge marketing campaign, in which Pepsi set up a blind tasting test between Pepsi-Cola and Coca-Cola, and showed that the majority of participants picked Pepsi as the better tasting of the two soft drinks – apparently the sweeter taste of Pepsi was preferred by consumers. In 1983, the market share gap between Coke and Pepsi was further reduced and the two companies owned 23% and 19% market share respectively. Coke responded by reducing prices, in order to slow down Pepsi’s attempt to catch up with its leadership. Then Pepsi responded by investing massively in advertising, through advertising deals with celebrities such as Michael Jackson and Michael J. Fox, a strategy that helped the firm to dethrone Coke temporarily from its market share leadership. Due to the Pepsi’s dominance in the mid-1980s, Coke decided to roll out a cola, which it called “New Coke”, with a new flavor formula which tasted similar to the sweeter Pepsi product. The result was a backlash against Coke for changing their timeless flavor. New Coke did not have a separate brand name but was simply known as “the new taste of Coca-Cola” until 1992, when it was named Coca-Cola II. The American public’s reaction to Coke’s change in taste and labeling was poor, and the new cola was a major marketing failure. The subsequent reintroduction of Coke’s original formula, rebranded as “Coca-Cola Classic” and sold alongside the Coca-Cola II until 1992, resulted in a significant gain in sales, and Coke reclaimed its number one position in most of international markets. The battle between Coke and Pepsi has been then characterized by rapid and continuous attacks and countermoves between the two rivals. Every time a competitive action was taken, it was followed by the rival’s reaction with an effect on both firms’ market share and profitability.

While competitive dynamics in low-tech industries such as the soft drink one are often centered around advertising and pricing strategies, since product features do not offer much space for differentiation, in technology intensive industries competitive dynamics are usually much more “complex”, and involve a wider repertoire of competitive actions. A perfect example is the battle between Apple and Samsung in the mobile phone and tablet industries. The battle between Samsung and Apple began in 2008, when Samsung invested heavily in the smartphone market segment by introducing a wide range of handsets, the Galaxy series, with the aim of replicating the incredible success of the iPhone, the smartphone introduced by Apple in 2007. Galaxy phones, targeted at the high-end market, had two main characteristics. First, they were powered with the Android operating system (OS), an open-source OS developed by Google and licensed for free to vendors, a true competitor of Apple’s iOS, the operating system mounted by Apple in its iPhones. Second, Samsung Galaxy phones had a design very similar to one of Apple’s phones. The rapid launch of numerous models of Galaxy smartphones, essentially offering smartphone users more alternatives in terms of price and design when compared with Apple (which launched just one phone model every year), helped the Korean competitor leapfrog Apple in the smartphone market. At the end of 2011, Samsung became the leading smartphone vendor of the world by capturing 23.8% of the market share, followed by Apple which grabbed 14.6% of the market share. At the entire market level (i.e. sales of handsets for both the low and high-end market), Samsung also overtook the market leader Nokia in 2012. In the meanwhile, in 2010, Apple introduced the iPad, a tablet touchscreen computer. This device, which essentially gave birth to a new industry, was an instant hit. Samsung at that time did not have any such product in its portfolio to compete with the iPad of Apple. However, by the end of the same year Samsung announced the introduction of the Galaxy Tab, a tablet with which one could also make phone calls. In particular, similar to what it did for the smartphone market, Samsung challenged the iPad of Apple by introducing different sizes of its own Galaxy tablets and became the second leading vendor in the tablet category. By lengthening the line of tablets, Samsung was essentially able to target different consumer segments, with different design and price preferences. As a consequence of the aggressive attacks of Samsung against Apple, both in the smartphone and tablet market, in April 2011, Apple filed a complaint against Samsung stating that the Korean handset vendor had copied some of the features of Apple’s iPad and iPhone in its Galaxy phones and tablet devices (in 2011, Apple spent more on lawsuits against “imitators’ attacks” than on research and development). As a result, the sales of various models of Samsung’s tablet computers and Galaxy phones were banned in Australia and Germany as their design was similar to that of Apple’s products. To retaliate, Samsung filed a case against Apple for breaking the patent infringement in the case of wireless technology that was owned by the Korean rival. Samsung claimed that the iPhone had borrowed heavily from Samsung’s own innovations, included patented technologies for transmission optimization and reduction of power usage during data transmission and third generation (3G) technology for reducing data-transmission errors. On August 2012, the San Francisco jury found that Samsung had persistently infringed many of the Apple utility and design patents listed in the complaint. It also found that Apple had not infringed the Samsung patents identified in the counterclaim. The jury verdict included more than $1 billion damages for Samsung’s infringement prior to the suit. The legal battle between both the companies spread to almost ten countries and became even more intense when Samsung challenged Apple through its guerrilla marketing strategies at the end of 2011. For example, in October 2011, when Apple launched the iPhone 4S, and many fans of Apple were waiting in a long queue outside the Apple store in Sydney, Samsung offered its new high-end phone Galaxy S II at a price of less than $300 (less than half of the launch price) to its first ten customers everyday, and this marketing was done from a temporary store that they had set up near the Apple store. Further in November 2011, Samsung released an advertisement which depicted the extent of rivalry between the two multinationals. The advertisement showed a long queue of people in front of an Apple store in the United States waiting to buy the Apple’s iPhone and while standing in the line, people were complaining about the various manufacturing faults in the iPhone. Finally they notice a person with Galaxy S II and the advertisement ended with the public’s comment that Galaxy S II’s performance was far superior to that of the iPhone. At the end of 2011, Samsung’s Galaxy S II sales surpassed that of Apple’s iPhone and won the “phone of the year award”. In sum, within a short period of three to four years, the two companies implemented various competitive strategies, such as new product introduction, radical and incremental innovations, imitations of the rival’s offer, product line extensions, price reduction, aggressive advertising campaigns as well as law suits. As in the case of Coke vs. Pepsi, all these rapid attacks and countermoves had an impressive effect on the two competitors’ revenues and profits.

The importance of the competitive dynamics was first emphasized in Schumpeter’s (1934) theory of “creative destruction”. During the 1930s, the Austrian economist Joseph Schumpeter (1934) developed the concept of the creative destruction to explain the dynamic market process by which market leaders and challengers engage in “an incessant race to get or to keep ahead of one another” (Kirzner, 1973: 20). Schumpeter’s framework was based on the idea that the market share gains obtained by industry leaders will motivate challengers to undertake new competitive actions in an attempt to obtain the industrial leadership. The outcome of this market process is the inevitable and eventual market share erosion and dethronement experienced by market share leaders over time through the process of competition (Schumpeter, 1934, 1950). Schumpeter emphasized that as a result of this creative destruction process no industrial leadership position is safe or sustainable, and thus “changes in industrial leadership” among competitors are inevitable. “For many firms, sustaining industry leadership, dethroning the current leader in their industry, or closing the market share gap between themselves and the current leader are key organizational objectives. In fact, market share leaders are more profitable because they exploit economies of scale and market power, as well reputational advantages” (Ferrier, Smith and Grimm, 1999: 372). In other words, Schumpeter argued that one of the main determinants of performance within the industry is the interplay and consequences of competitive actions and reactions. Over time, the creative actions of challengers threaten the stability of the leader’s position, causing an eventual dethronement.

Various authors suggest that the higher the number of competitors in an industry, the higher the probability of the attack intensity against the firm products (Smith, Ferrier and Ndofor, 2006). Therefore, the more the industry is populated by rivals, the more the firm is likely to feel that both its competitive position and its profitability are threatened (Porter, 1980). As competitive intensity increases, a firm may take no action or may respond to competitors’ attack. The firm can respond directly to competitors’ attack either by reinforcing the competitive position of threatened core businesses (e.g. through stronger marketing campaigns, by extending the distribution channels, or by adding new features to existing core products/services) or by abandoning the field. Alternatively, it can respond indirectly by expanding its business portfolio, that is, products or geographic markets. Eventually, the response depends on the perceived level of the immediate threat (Smith et al., 2006) and is influenced by how much the firm perceives the new lines of business to be profitable (Hutzschenreuter and Grone, 2009). However the firm will respond to the competitors’ attack only if it is aware of the attack. This means that competitive moves have to be sufficiently large, and generate signals that are visible to the firm (Chen, Smith and Grimm, 1992; Smith and Grimm, 1991). The motivation that actors have to attack or respond to competitors’ action depends on the potential payoff from the contested product (Ferrier, 2001). Finally, the decision to attack or defend depends on the firm’s resource endowments (Smith et al., 1991). In sum, there are three organizational characteristics that influence strategic actions: factors that influence the awareness of the context and signal threats or opportunities for incumbents¹; factors that induce or impede the motivatio...

Table of contents

• Cover
• Title
• Introduction
• Part 1  Competitive Dynamics
• Part 2  Competitive Dynamics in Technology-Based Industries
• Index