Market Category Analysis Sony Ericsson Cell Phone Market

¶ … mobile phone and telecommunications industry is one of the fastest changing industry in the world. Within short periods of time, new technologies and designs are appearing on the market and it is often a challenge to keep pace with them. Further more, the latest change have shown a certain translation from the primary objective of such a product, communicating at all times, transforming it into a product that carries visual and sonic devices as well.

According to David Mery, the mobile phone market has five main characteristics, of which two are of particular interest for us. Mobile phones target a "mass-market of consumer, enterprise and professional users" and the "manufacturers need to differentiate their products in order to innovate and compete in a fast-evolving market"

. These two characteristics of the market will have a certain impact on the final strategic decision we will be taking.

In 2005, the forecasts are more than optimistic, both in terms of supply and demand. As such, according to "Humming Along: 2005 Mobile Phone Market Forecast," manufacturers will produce nearly 720 million units in 2005, which represents an increase by 5.8% since 2004

. Sales are also estimated to around $112 billion in revenue generation

Having a look at the main competitors in the mobile phone market, the first place, in terms of market share, is occupied by Nokia, with 30.4% of the market, followed by Motorola, with 15.3% and Samsung with 12.7%. In this list, Sony Ericsson occupies sixth place with 6.2%

. As we can see, the mobile phone market has an uncontested leader (Nokia) and two challengers (Motorola and Samsung), with Sony Ericsson playing perhaps the surprise card.

As the industry became more and more challenging, the importance of lower cost became fundamental and Nokia began to lose from its once 37% market share due to entrances from significant competitors from South-Eastern Asia, most notably Samsung and, on a smaller scale, LG. The problem, as identified by Nokia's communications director, Kari Tutti, was that the company's portfolio did not cover all areas of the market, which meant that there were large niches to be covered by Asian producers. A proper extension of the product portfolio was the best answer for the Finnish company. However, as we can see, globalization and trade liberalization plays a significant role in the mobile phone industry as well. Companies who are able to relocate their production to areas of the globe where the workforce and overall production costs are much lower will tend to be able to sell at more competitive prices. This trend is most likely to follow an ascending path into the future as well.

The social and cultural external factors play a fundamental role in the evolution of demand and sales in the future. Indeed, more and more we are dealing with different cultural tendencies. One of the relevant ones is the need imposed by consumers to facilitate different other functions on the mobile phone, other than the basic communication function. This includes video cameras, audio devices etc. From this point-of-view, we may state that there are no signs that this will come to an end into the near future.

Sony Ericsson has defined its place in the constant changing telecommunication and mobile phone market according to its motto. As such, the people at Sony Ericsson are working to "establish Sony Ericsson as the most attractive and innovative global brand in the mobile handset industry," The two pillars of the present time Sony Ericsson strategy can be evaluated from this mission statement. They are brand attractiveness and constant innovation, as the capacity to bring new products and services on the market before other companies do.

One of the most important pillars in the attractiveness component is the phone design. A phone design operates both on the rational level (for example, in terms of utility, when referring to the phone size or the battery lifespan) and emotional level. Ericsson is working on design in one of its Creative Design Centre, with studios in Lund (Sweden), London, the U.S.A., Asia and Japan. Design has two important components worth considering: industrial design and graphic design.

Industrial designers appeal to the rational level, as they develop the shape and size of the product. At the same time, a fully operational phone, appealing to all sense, implies a coordination with the graphic designers, who work on the emotional level by implementing icons, graphical components etc.

In terms of financial results, especially on the marketing and sales level we are interested in, Sony Ericsson has successfully performed during the 2nd quarter of 2005. As such, sales have grown from 1,289 million euros in the first quarter to 1,614 million euros in the 2nd quarter, which represents an increase in sales by 25.2%. According to the company's own evaluation, the increase in sales volume was mainly due to "new products started shipping"

. This meant that the company's overall strategy gradually modified so as to expand the product portfolio and, especially, the range of customers approached by the products the company commercializes. A wider range of price segments was such reached.

Following the analysis of the external environment and the main trends in the future, as well as this brief internal analysis of the company, we may determine several courses of action for Sony Ericsson in the future. In my opinion, the company has a choice for a reactive or a proactive strategic approach. We will be examining what each implies in terms of resources, advantages and disadvantages and projections into the future.

A reactive strategy basically implies that the company "changes in reaction to changes by a competitor"

. In Sony Ericsson's case, this would mean that the research and development department would be neglected in favor of more efficient production flows, with possible scale economies and cost reductions. In the event of such a choice, all strategic and tactical movements that Sony Ericsson may choose for its future will only come after innovatory moves form the competitors and as a reaction to them.

In terms of advantages, one of the most important one in such situations is the fact that many components of the company can be diminished in terms of size and costs. I have given, as a first example, the research and development department. Indeed, because the company has chosen a reactive strategy, it will not base its evolution on any innovatory moves, innovatory products or services etc. Hence, the R& D. department will lose its most important function and will become less useful.

Deriving from this advantage, we have the cost advantage. In general, it is assumed that leading a reactive strategy is much less expensive than the proactive strategy. It seems logical that it should cost much less to simply adapt the decisions to the already known variables on the market rather than create the variables themselves. Further more, the revenues are not necessarily hurt, because the company can specialize its production on specific segments of consumers who will always be interested in less expensive products (available for Sony Ericsson in the event of such a choice because of smaller costs of production) and who will be a step behind the market trends.

In terms of disadvantages, the most obvious one is in terms of the company's image. A company promoting a reactive strategy will always be considered one of the less important players on the market and I am not sure that a company like Sony Ericsson can afford such a perspective. Indeed, because it has always been associated with a leading, innovatory strategy, switching to a reactive strategy may have a negative impact on the company's loyal consumers, who have always chosen the brand because of its innovatory characteristics.

Second of all, as we have seen, the mobile phone market and industry is an extremely dynamic one. Even in poorer countries, the mobile phone has become a necessity and it is often the case that the mobile phone per capita indicator is greater than the fixed phone per capita one. As such, in an industry so dynamic and so open to changes and new developments, adopting a reactive strategy may bring into question the future of the company itself.

A proactive strategy is "a business strategy in which a company tries to anticipate changes in a market and the competition, and make the first move"

. It is quite obvious what such a strategy implies. First of all, it implies taking action before all other competitors. In a market so dynamic as the mobile phone market, this means an extra added emphasis on the research and development actions. As we have previously discussed, the mobile phone industry is quite complex because it does not only rely on technological facilities and improvements. Design plays a crucial role, as do any other elements that may work on the emotional level of each consumer. Further more, we are currently experiencing a period where the actual mobile phone, as a communication function in itself, is being combined with several other gadgets, the video and photo camera being just two examples. New technologies are implemented, both my mobile producers and telecommunications giants. All these elements show that the mobile phone market and industry practically has no boundaries and the more a company is willing to invest and develop new ideas, new creations and technologies, the more it is likely to succeed and consolidate its position on the market.

Another advantage of the proactive strategy is also the fact that, because the company applying the proactive strategy is setting the trends for the industry, it is better able to adapt to them as well. In the case of mobile phones, for example, innovating and launching a new technology will also mean that the company is best able to adapt its own internal factors to what the innovation implies.

On the other hand, one of the greatest disadvantages with a proactive strategy is the enormous risk a company is assuming. If we apply this statement to Sony Ericsson, we may discover, for example, that some of the new technologies that have been developed will not be well received by the consumers. Sony Ericsson has had such problems in the past, with products that have been subject to significant investing campaigns, only to be terribly received by the market. The subsequent result of such actions was large losses that needed to be somehow covered. Can a company such as Sony Ericsson risk, through a proactive strategy, the possibility of encountering losses because of a different response from the market than expected? In my opinion, the answer is fully reflected by some of the trends we have previously seen in the 2004-2005 Sony Ericsson strategy. The answer is hedging.

This is what happens in a market such as the mobile phone market. Certainly, some of the responses from the market can only be estimated and, in many cases, these estimates, if they prove to be incorrect, may cost a whole lot of money. On the other h and, Sony Ericsson can also develop an auxiliary tactic, a tactic that will help cover any eventual possible losses from the main proactive strategy. This is represented by an expansion of the portfolio of products to a level where most consumer groups can be reached. This will mean that no matter what the result of the proactive strategy Sony Ericsson promotes, a certain part of the business will still rely on more cautious grounds and there will be sound revenues from that respective side.