Motorola Strategic Management Appendix, Case Study Example

A1. Motorola was the first mobile communications company to enter China. The company initially won Chinese customers by offering cheap mobile communication solutions in the form of pagers. A huge credit for company’s initial success at quickly capturing a major market share of mobile communications sector goes to the leadership of company’s CEO at the time, Mr. Robert Galvin. Impressed by the vision of Chinese leader Deng Xiaoping, Mr. Galvin realized the long-term potential of mobile communications market in China but China only allowed foreign investments as minority stakes in joint ventures in the early 80s. Instead of panicking, Mr. Galvin decided to learn about the Chinese way of doing things and soon figured out that a positive goodwill was the key to gaining favorable treatment from the government.

Motorola set up training centers in three major cities and also trained people at state-owned enterprises and universities. The company also engaged in social welfare programs and committed to transfer requisite technology to China as well as create local jobs. The efforts paid off and Motorola was allowed to establish 100 percent company owned subsidiary by the name of Motorola China Electronics Limited (MCEL) and enjoyed a near monopoly until 1994. The company continued to invest in local economy in numerous ways including establishing a local supply chain network.

Beginning 1995, several factors started contributing towards decline of company’s market share and competitive position in China. The first factor was the entry of Nokia and Ericsson in Chinese market which was the first time Motorola had a competition from rivals with significant financial capital and technological resources. The second factor was the introduction of competing standards GSM and later TD-SCDMA. Making the matters worse was the popularity of digital handsets that ran on GSM at the expense of Motorola’s analog handsets that operated on CDMA. The competition only grew with the entry of local players especially TCL, Amoi, and Ningbo Bird. While the local companies didn’t have the technology prowess or financial resources of international giants like Motorola and Nokia, they had advantage in understanding the tastes and preferences of local population and gained by introducing trendy and colorful low-priced handsets. In addition, they also had better distribution channels and specifically targeted users in second and third tier cities.

Despite more resources, the company did a poor job of understanding its market. Not only did the company fail in understanding the lifestyle choices of Chinese customers but also underestimated the degree of cost consciousness among Chinese customers until it was too late. Motorola’s earlier efforts to build goodwill also backfired as local companies including Motorola’s own partner Eastcom started competing because they had gained valuable insights into quality control, production, and testing. The company also suffered from late responses to competitive threats including late adoption of GSM and late entry into low-priced handsets that allowed local companies to build market share.

Porter’s Five Forces analysis is an effective way of understanding the current competitive landscape in China as well as Motorola’s competitive position. The five forces are supplier power, buyer power, competitive rivalry, threat of substitution, and threat of new entry (MindTools).

Supplier Power: The supplier power is now high in Chinese mobile communication industry because mobile phones have become a commodity and there are many players in the industry many of whom outsource certain processes such as R&D and manufacturing to components’ manufacturers and mainly focus on marketing and distribution. The large number of players means the suppliers are not dependent on any single player for the bulk of their business though large players such as Nokia, Motorola, and Ericsson do have greater negotiation power against suppliers than their smaller competitors due to the greater volume of business.

Another element working in favor of suppliers is the fact that larger players collectively are losing market share as evident by historical trend. Motorola’s market share was 32 percent in 2001 while Nokia’s share was 28 percent during the same period but by the first half of 2005, Nokia’s market share had fallen to 19.7 percent while Motorola’s market share took even a deeper dive to fall to 12.1 percent during the same period. The market share being lost by larger players indicates that the competition has been going and the number of players has been increasing. It could be claimed that the mobile phone industry is slowly moving from oligopolistic market structure to monopolistic market structure. The trend will continue to be towards greater supplier power in China because China’s mobile communications market still has significant room to grow which should attract more players.

Buyer Power: Just like supplier power, buyer power is also high in mobile communications market in China. Unlike Motorola’s earlier days when buyers had no option but to buy from Motorola, there are now several international and local companies that offer handsets. In addition, the competition between the sellers has also played in favor of the buyers as evident by both lower prices and falling profits margins for the sellers. Moreover, the Chinese market still has ample room to grow which means both local and future market players will continue to work hard to attract more buyers as well as maintain brand loyalty among existing users. China now has the largest number of users in the world after it crossed the U.S. in 2001 and its over billion population means that it will continue to attract both local and international investors looking to grab a share of the pie.

Competitive Rivalry: The competitive rivalry is also high in China as evident by large number of sellers in the market as well as declining profit margins, even among large players. The rivalry is also high due to the fact that large players such as Nokia and Motorola etc. have similar technologies and even smaller players have also been catching up in terms of features such as camera phone and music capabilities. Another major factor that has contributed towards high competitive rivalry is China’s accession to the WTO due to which the country had to remove many artificial barriers protecting its domestic policy. Globalization has also increased economic connectivity among nations as well as ease trade restrictions which has led to higher competitive rivalry in many lucrative industries including mobile communication industry.

Competitive rivalry has also increased because many of the production processes such as manufacturing, R&D, and distribution can be outsourced and all the market players can gain access to the same suppliers. In addition, the size of the market is also large enough to accommodate large number of players each of whom can achieve economies of scale.

Threat of Substitution: The threat of substitution is high in the Chinese mobile communications industry because multiple players offer products with similar features. In addition, mobile phones can be found in almost every price range as well as design and colors. Mobile phone has now become a commodity and the cost of producing mobile phones has significantly declined due to advancements in technology as well as economies of scale. Large market players have been forced to reduce prices or offer low-priced models and smaller players have been forced to offer advanced features instead of offering just basic features. This demonstrates that the market players realize customers have several options available to them and would jump to the competition if they are not listened to.

Threat of New Entry: The threat of new entry is high due to the absence of natural and artificial barriers. The cost of setting operations has declined both in terms of time and financial resources. The market entrants could outsource almost every aspect of the production process and could simply focus on marketing and distribution. China’s membership in WTO also forced the country to remove many legal barriers it had instituted to protect domestic players. In addition, it is also relatively easy to terminate operations which also results in high threat of new entrants. By 2000, there were already 28 mobile phone manufacturers in China of which 17 were joint ventures or solely foreign-owned enterprises which demonstrates that it is relatively easy to enter China’s lucrative mobile communications industry.

Industry Key Success Factors: As far as the key success factors are concerned, the history of mobile communications industry in China shows that listening to and understanding consumers’ preferences is the most important success factor in China. Motorola lost its dominant position because it made several mistakes in understanding consumers’ preferences. First of all, it didn’t realize until it was too late that Chinese consumers didn’t only care about function but also form. In addition, it also failed to realize that Chinese consumers are quite price conscious because income levels in China are not as high as in developed countries. The company was also late to adopt GSM technology which is better suited to internet applications.

Another key success factor is quality and customer service. The smaller players did make initial inroads by offering visually appealing alternatives to offerings from larger players but they soon got in trouble due to poor customer service and poor quality of products. As Chinese customers continue to gain more power, they will develop even higher expectations for quality and customer service. Another key success factor is to offer products in a wide range of prices because bulk of the future growth will come from second and third tier countries where average income levels are quite low, even compared to big cities like Beijing and Shanghai. The huge population of China means there is also a considerable market for high-end models. There is no one-size-fits-all solution to winning competition in China. The fourth key success factor is leadership. Motorola’s earlier successes were also due to capable leadership of CEO Robert Galvin who kept a close eye on external factors and took steps to act on opportunities in a timely fashion. But the company’s leadership after Galvin did a poor job of anticipating threats and monitoring the external environment which allowed major competitors such as Nokia, Ericsson, and Samsung and even smaller players to make a significant progress at the expense of Motorola.

A2. One of the company’s core capabilities is research and innovation. The company has a history of introducing innovative products since its beginning including battery eliminator, two-way radio, pagers, and wireless communication products. The company’s other capability is strategic innovation. The company initially met resistance from the Chinese government in setting 100-percent company owned facilities in China but the company’s leadership didn’t give up and studied the Chinese culture and system to get its way with the government and build a dominant industry position. The company’s capabilities also include design as is evident by the global success of its RAZR line of wireless handsets.

Several opportunities exist in Chinese mobile communications industry for Motorola to use its capabilities to regain its leadership position. Mobile handsets are increasingly becoming similar and Chinese customers have also shown higher preference for product quality at reasonable prices as well as reliable customer service. The company already has world-class research capabilities, supply chain network, and design capabilities but the company needs to take steps to improve its marketing capabilities as well as develop more efficient and flexible business model. Despite possessing capabilities required to succeed in the market, the company has been slow to respond to changing customers’ preferences and tastes as well as responding to competitors’ competitive strategies. Improved marketing capabilities will ensure that the company stays in touch with consumers’ tastes and preferences and develop and introduce technologies that meet or exceed customers’ expectations better than the competition. In addition, the company will also become quicker in responding to changing market trends. Motorola will again become competitive because it will be able to offer superior technology at affordable prices due to economies of scale and it already has a reputation for quality customer service. The company’s problems have not been due to the fact that it lacks capabilities to succeed in the market but due to its inefficient business model that has been slow to respond to changing market circumstances and its marketing department that did a poor job of understanding customers’ needs and preferences. Understanding customers will also allow the company to introduce technologies that are customer-centered. In the past, the company introduced technologies and hoped customers would embrace it but it has not worked well. While production processes can be imitated, innovation is difficult to imitate and by introducing new technologies at a faster pace than the competition and designing technologies in response to customers’ preferences and needs, the company will be able to maintain a sustainable competitive advantage.

A3. One of the major risks the company faces in China is the continued downward slide in its profit margins and market share as the competition continues to become more intense. There is also a risk of overstretching its resources too thin that the company cannot compete in any product category effectively. One of the major challenges faced by the company is to convince extremely price-conscious customers that its superior products are worth a little price premium. The company’s other challenge is to create a sustainable competitive advantage that could help it lessen the impact of price war in China’s mobile communications industry.

A4. Motorola should focus on profitability in China because it is apparent that greater market share may result in higher sales volume but it does little to prevent profit margins from declining. In addition, the price-based competition will continue to increase due to the bulk of Chinese customers who are price-conscious. Thus, a better strategy will be to focus on middle to high income customers that do not mind paying higher prices for better quality and user experience. This will also help Motorola increase the prestige of its brand and the company could later offer more affordable versions after capturing a major market share of the middle to high income customer segments. This strategy will ensure high profit margins and will also improve operating efficiency and control of the business. This will also help reduce competitive pressure since only the competitors with significant research resources like Nokia and Ericsson may be able to compete with Motorola. China has a huge population and the average income has been growing due to globalization, thus, the company’s targeted customer segments will also continue to grow.

Appendix

Reference

MindTools. (n.d.). Porter’s Five Forces. Retrieved January 14, 2013, from http://www.mindtools.com/pages/article/newTMC_08.htm