THE BIG TECHNOLOGY SHIFT
SUCCESS GOES BEYOND APING APPLE
Diiverrsiiffyiing Marrketts,, Achiieviing Harrdwarre--Soffttwarre Converrgence Arre Key fforr Technollogy Companiies
By Ethan Inhyuk Choi
The “Great Recession” has affected industries everywhere, yet its impact on the electronics industry has been particularly severe. Unlike other businesses, the electronics industry is characterized by a global ecosystem of multinational players. Western firms handle the software and key components; Korean and Japanese firms the design and development of set products; and Chinese and Taiwanese firms the assembly.
Leading players in each part of the value chain therefore target not their local markets but the entire world. A case in point is Samsung Electronics, generating approximately 90 percent of its sales outside its home market. Such a structure had afforded the industry a certain degree of immunity from localized economic crises. The Great Recession, however, has served as a wake-up call to electronics industry players as economies everywhere took a synchronized dive into the abyss. In response to this new reality, the electronics industry is taking a series of initiatives to restructure.
The first of these is geographical market diversification. Of greatest interest to industry players in this regard is how to capture the “Next Billion” consumers in emerging markets such as Brazil, India, and Africa. The lack of infrastructure in these markets makes it incumbent upon electronics companies entering them to build their own distribution networks.
There’s also the challenge of offering products that are both affordable and of decent quality, at least in their basic functionalities. For these reasons, only a limited number of leading companies with large-scale investment capabilities such as Nokia were able to operate in the Next Billion markets prior to the Great Recession. These markets are now considered lifeand- death battlegrounds for the global electronics industry as they are home to a sizeable younger generation of consumers whose potential purchasing power outweighs that of developed countries. The fact that Samsung Electronics has declared Africa to be its key growth market, setting up a separate regional HQ for
the African region earlier this year, can be understood in this context.
A second visible move is toward strengthening consumer loyalty through convergences between hardware, software and services. Convergence in the past used to be hardware-tohardware ― as exemplified by the cameraphone. The success, however, of the iPod/iPhone experiment ― combining hardware with software and services (iTunes and App Store) . is shaking the industry to its very core. Whereas the hardware-to-hardware convergence that used to prevail had only brought
about cannibalization between different devices without creating new markets, convergence of the hardware-to-software variety is proving itself capable not only of unlocking new revenue sources through provision of services but also of bolstering the loyalty of key customers.
In response, electronics giants such as Samsung, Nokia, Sony, and LG are putting all their weight behind developing a whole array of connected products and services that would help them grab a slice of the software convergence market.
A third major shift is the heightened emphasis on the mid-end market. Only three to five years ago, electronics makers were launching one new product after another in a race to win over the early adopters and high-end users. This customer segment was willing to pay a premium for functionalities that were not available in mid-end products ― a premium that allowed companies to retrieve some of the early development costs. Recently, however, the tide has turned.
Not only has the center of gravity shifted to the mid-end market, there has been the takeoff of a market for “affordable luxury” products: products offering previously high-end features to mass consumers. Apple’s iPhone is a prime example. The iPhone provides features once available in phones over $1,000 at less than $300. Another example would be the growth of the market for miniature laptops, or “netbooks.” Until recently laptops cost more than $2,000 ― not exactly a commodity for all. The introduction of $300-500 netbooks with all the necessary features, however, generated a euphoric consumer response, quickly turning netbooks into a mainstay of consumer electronics. The expansion of the affordable luxury segment is likely to go on for the foreseeable future, given the growing number (since the crisis) of valueshopping consumers with an appetite for highend functionalities.
The biggest change in the sphere of operation is the shift, of power and functions away from corporate headquarters to local units. Until recently, most players had preferred to run their organizations in a highly centralized way, with HQ retaining such critical functions as planning and product development, while conceding only limited, sales-oriented functions to local units.
The recession, however, has starkly revealed how such a top-heavy approach impairs the ability of organizations to respond to crises in each locality. Thereafter, electronics companies are assigning greater roles to their local units, empowering them to forecast local demand, plan production, and thus respond quickly to fluctuations in demand in their respective areas.
The last visible trend in the industry is the growing move toward “Lean” operation. In other words, the electronics industry is being affected by the same universal trend toward the variability of fixed costs through outsourcing core functions and minimizing working capital. IBM’s recent outsourcing of its logistical operation to an external party can be viewed as evidence of this ongoing trend.
Electronics makers are all engaged in similar efforts in response to these trends, but they vary greatly in their levels of commitment and speed of implementation. I would predict a greater shakeout in the electronics industry within the next five years than that which occurred in the last two decades.