Study of Vertical Integration for Apple and Samsung in Smartphone Industry

Submitted To:Prof. M. Akbar

Submitted By:(Group – 3, Section-B)WMP09059 Abhay VigWMP09064 Alok MishraWMP09070 Arun Kr SharmaWMP09079 Gaurav BhatiWMP09097 Prateek RaizadaWMP09109 Shweta Rastogi

Agenda

Vertical IntegrationSmartphone-Industry AnalysisSamsungAppleCompetitive Advantage – Apple Vs

SamsungHistorical Financial AnalysisScenario Based Financial Projection

Vertical Integration

Firms choose to vertically integrate to achieve

transaction cost economies

To minimize several risks involved in transacting with

many parties. These risks include Difficulties in enforcing contracts with many different parties

Challenges of ensuring the quality of raw materials,

component parts and/or service reach the required level of

standards

Risks of asymmetric information and opportunistic behavior

aimed against the firm.

Scale and scope economies

Vertical Integration Forward

▫Aiming towards finished products or towards End in supply chain

Backward ▫Towards Raw Material i.e. at the Start in

supply chain

Smartphone

Brand - design, manufacturing and distribution Hardware including features such as Camera, RAM,

ROM, Design etc. Target Group – affecting pricing and advertising Software – design, manufacturing and distribution Supporting applications Add on Options – printers, card readers etc.

Service after purchase

Bargaining Power of Buyers (High)

• Buyers benefit from high industry competition

• Access to market information

Bargaining Power of Suppliers (Low) for Apple

& Samsung• Samsung is its own supplier

for most components & raw materials

• Apple is also moving towards chip designing to reduce

power of suppliers

Threat of Substitute Products(High)

• Any smartphone that performs the same functions is considered to be a substitute

• Functionality of iOS, Android or Windows phone is almost same.

• Outside of Industry threat of substitutes is low. E.g. Tablets, Laptops

Threat of New Entrants (Low)

• High capital requirement for operations.

• High R&D Cost to stay competitive

• Strict Patents • Need to establish a

competitive brand

Internal Rivalry (High)• Concentrated Industry 03

largest players make up 44% market share.

Smart Phone Industry Analysis

Industry DominanceSmartphones: Leading Companies by % Volume Share 2010-2013

Global Brand Owner (GBO)

4-year trend

2010

2011

2012

2013

Samsung Corp 12 19 28 31

Apple Inc 17 17 17 15

Lenovo Group Ltd 0 2 3 4

Nokia Corp 25 12 6 4

LG Corp 4 4 4

Sony Corp 3 3 4

Huawei Technologies Co Ltd

1 2 3 4

Yulong Computer Communication Technology (Shenzhen) Co Ltd

1 1 2 3

Samsung

Samsung Electronics

• Flagship company of Samsung Group

• Contributes 70% revenues of Group

• 195 Subsidiaries world-wide

• 63 companies for making components for

its subsidiaries

• Manufacturing of Home appliances

▫ (TV, RF., W. Machines, Mobile Phones)

• Biggest Manufacturer of Memory Chips

and Semiconductors

• 3 Major Divisions

▫ Mobile Division

▫ Consumer Electronics Division

▫ Semiconductors Division

Consumer Electronic

s

In-Home Consumer Electronics

Digital TVs

Portable Consumer Electronics

Wearable Electronics

Smartphones

Samsung Mobile Division Evolution

A Humble Beginning

New Management

Go Global

Android Era

Mobile Division Started1988 – First Mobile launched- Low quality perception

Ultimatum – Produce mobile phones comparable to Motorola 1993-96

1983-93

Focus on Component Manufacturing

FutureTizen?

Galaxy S Launched2012- World’s largest cellphone maker

2010

1998

Samsung Mobile Phone Supply Chain

(Source: In the Belly of the Beast: Samsung Electronics’ Supply Chain and Workforce in South Korea, Jiwon Han, Wol-san Liem, and Yoomi Lee)

Components in Flagship Smart Phone – S6

Samsung Galaxy S6 Components

Function Manufacturer

Accelerometer / Gyro Invensense

Application Processor Samsung

Audio CODEC Cirrus Logic

Baseband Processor Samsung

Envelope Power Tracker Samsung

Heart Rate Sensor Maxim

Image Processor Samsung

NFC Controller Samsung

Power Management1 Samsung

Power Management2 Samsung

PowerManagement3 Samsung

Pressure Sensor STMicro

RAM Samsung

RF Transceiver Samsung

ROM Samsung

Touchscreen Controller STMicro

WiFi / Bluetooth Samsung

Wireless Charging Texas Instruments

Vertical Integration – A Strength of Samsung

• Invests heavily in its own factories

• Manufactures key components▫ Largest memory manufacturer and LCD display manufacturer

• Can make all the major components of a phone cheaper

and then bundle and sell those components to a phone

vendor

Competitive Advantage

In-house DRAM

NAND Flash

Displays including LCD, AMOLED

Major Share in company manufacturing OLED display for Mobile handset

Cost Efficiency

Assured supply for critical components

Technological Innovation

Differentiation

Samsung- As a Component SupplierSamsung's largest clients (Q1 2010)

Rank/company Part description% of total

sales1 Sony DRAM, NAND flash, LCD panels, etc 3.7

2 Apple Inc.AP (mobile processor), DRAM, NAND flash, etc

2.6

3 DellDRAM, flat-panels, lithium-ion batteries, etc

2.5

4 Hewlett-Packard

DRAM, flat-panels, lithium-ion batteries, etc

2.2

5 Verizon Communications

Handsets, etc 1.3

6 AT&T Inc. Handsets, etc 1.3Major supplier to its Rivals such as Apple

• Supplies LCD Panels to other TV manufacturers

• Primary phone component manufacturer of Apple

• 3% of Samsung’s total sales go to Apple

Performance

Advantages of VI to Samsung

• Newer Technology at Faster Rate▫ Owns and controls research, component supplies,

manufacturing▫ Devices equipped with faster RAM, extra storage, AMOLED

screens• Latest Technology at low prices

▫ Gets its components cheaper rates▫ Results into cheaper manufacturing rates and helps Samsung

in selling their devices at lower prices than competitors• A priori Component Supplies

▫ Most of the cost of Smart Phone manufacturing goes back in to their component manufacturing division

▫ Increasing their overall revenue▫ In turn goes back in to research funding▫ Prioritize supplies to Samsung by holding off others.

Concern - Huge Dependence on Android

• Huge Reliance on Google for Android OS• As of August 2015, Samsung have a 37.8% share of the

Android market, which is quite huge.

Vertically Integrate to OS - Tizen

Continued efforts to develop its own OS to reduce its reliance on Android OS Over the years it has been involved in the development of Bada, SLP, and Tizen

Platforms.

Apple

Apple

Company’s main product lines: computers and portable consumer

electronics, software, cloud services and retailing.

Success can be attributed to software and service products such

as iTunes that complement Apple Inc’s hardware line, creating an

industry-leading content consumption platform for mobile

devices.

Premium pricing of its products

Unaffordable for mainstream consumers in many emerging

markets.

AppleHardware

Though not produced within, its product are Slim, ergonomic, user-friendly and they tend to have a price premium over other competing products.

emphasize simplicity in the operation and minimalist design, along with other key performance features as battery life, graphics etc.

Software iOS mobile operating system – various media

consumption and third party applications. Its primary content offerings are the core of its

delivery platform.Wide selection of software - In 2013, there were six

million developers in Apple’s developers community,

Apple

Integrated ecosystem of its products and services

unmatched line-up of the media consumption devices

and associated services

Advantage

It locks consumers within the ecosystem, making

switching between platforms somewhat difficult. This

along with the small number of alternatives has made its

users loyal.

Vertical Integration Trends Among Industry Leaders

• Apple Inc. boasts one of the most versatile vertical integration strategies in the smartphone industry.

• Apple Inc., is vertically integrated because it is essentially four companies in one, thereby controlling “all the major critical parts of the chain used to make and sell products.”

(a) It is a hardware company (it designs its own hardware),(b) a software company (it owns, develops and optimizes its

software),(c) a services company (it equips its products with services

such as the iTunes and iCloud) and (d) a retail company (it provides consumers with a unique

retail experience)

Apple vertically integrated specialized buyer

Apple Inc.

Apple outsources the manufacturing of all the products, and purchases other key components from third parties. It has to rely on external suppliers for manufacturing and assembling.

VI explained through –

Operating System (Proprietary iOS), numerous application supporting the Operating system

(iTunes & iCloud),

Apple Online Retail Store for most of the products Premium pricing of its products Not able to penetrate mass segment

iOS Market Share

Apple – Competitive Advantage

Integrated Hardware Software Approach Software Content Services provided Applications – product specific

Drivers of Apple’s VI• Scale and Scope Economies – Since the outside suppliers are

supplying majority of their producers to Apple Inc. only hence their ability to take advantage of economies of scale and scope by aggregating the demand is very less. Hence Apple gains maximum from Vertical Integration.

• Asset Specificity - As Apple Inc. is using same software and distribution system and also same suppliers for its hardware hence it’s Asset specificity is very high. Therefore Apple Inc. will benefit maximum from Vertical Integration.

• The Asset Specificity of Apple Inc. has reached to that level where transaction costs of market exchanges are so large that Vertical Integration is more agency efficient than market exchanges.

• Product market scale and growth – As Apple Inc. control a large chunk of the computer and mobile market hence it will have maximum advantage from Vertical Integration.

Financial Analysis

Financials

Historical Financial Analysis

Scenario Based Projections(Excel File)

Financial Analysis

Thank You