Case Study

MCS November 2016 Industry Analysis Overview

An overview of the real-world industry for the MCS November 2016 CIMA exam.

Industry Background

As the pre-seen points out there have been four generations of mobile phones with each generation allowing mobiles to do more. The key issues are the type of data that can be sent between phones, the size of that data and the speed and security with which it can be sent. Each new generation impacts one or more of those areas.

1G (First Generation): between the mid 1980s and early 90s, mobile phones were fairly limited in what they could achieve allowing users to make voice calls only. These calls could be easily traced and anyone with a radio scanner could listen in due to the fact that they relied on analogue signals.

2G: by the early 1990s mobile phones were using digital signals. Digital phones used the same radio technology as their analogue predecessors but it's used differently. The new digital phones converted the caller's voice into 1s and 0s (binary) and then compressed it allowing many more calls to occupy the same space that a single analogue call used to occupy. So, essentially digital allowed for more data to be transferred and the data was more secure because it was encrypted i.e. disguised. It was with this generation that SMS/text messaging came to be used.

3G: the third generation of phones came on the scene in the early 2000s as bandwidth (i.e. the volume of data that can be carried over a channel) was greatly enhanced as well as connection speeds. This allowed users not just to make calls and send basic text messages, but for mobiles to transfer other types of data such as photos and to connect to the internet allowing users to browse the web on their devices. We are still living with the impacts made by 3G and the smartphones that were born at this time.

4G: just like 3G but faster still (up to 10 times faster than 3G). The spread of 4G networks has enabled an expansion in the capabilities of mobile phones and with the expected arrival of 5G technology in the coming decade we can expect a "hyper-connected" world in which the internet of things really comes into play with physical devices, homes, vehicles etc able to exchange data with one another and us in real-time.

This is an industry with short product life-cycles and it's defined by constant technical innovation. These new technical updates are rapidly mimicked by competitors with most players pricing aggressively to attract consumers who have a range of choices. No single player dominates the mobile manufacturing space. Manufacturers no longer differ greatly on their offering with few smartphones truly standing out for their technical superiority. Most phones do a pretty good job and are very similar in terms of their functionality. Moreover, consumers are generally well-versed now about the products on offer and they have the ability to easily change products if unsatisfied. All of these conditions mean we are essentially dealing with an industry exhibiting something like perfect competition. Competition is therefore high with firms unable to dictate prices to consumers. Instead the market price yields to the power of market forces and the consumer wins out.

Because technical innovation plays such a central role in the industry, R&D spending is necessarily high. In fact, two of the major mobile manufacturers featured recently in the top 10 spenders on R&D in the world - Samsung at number two and Microsoft at number four. And because innovation and research are so important, so too are highly-skilled workers with competitors locked in a fierce fight for the best talent to get ahead.

Main Competitors

By the middle of 2016 the market share of the major mobile phone manufacturers was as follows according to Strategy Analytics:

Rank/Manufacturer/Market Share (Q2 2016):

1. Samsung, 22.8%

2. Apple, 11.9%

3. Huawei, 9.4%

4. OPPO, 5.3%

5. Xiaomi, 4.3%

6. Others, 46.3%

Samsung was growing at a healthy 8% per year in the smartphone space until very recently but their brand will surely have suffered major damage given their failure to fix the Galaxy Note 7's battery issue and their decision to discontinue production of what was to be their flagship model. Nevertheless, this is a powerful player with industry-leading technology in the form of memory chips and LCD screens, serious financial muscle and a very efficient supply-chain.

Apple's market share has declined by 2% in a year but the company has always been more focused on high profitability and maintaining fat profit margins than on having a dominant market share. Apple's strengths include its powerful brand story and resultant high customer loyalty, its product design and development and inventory management (more on that below). These strengths have made Apple the world's most valuable brand.

Huawei's was the success story of 2015 with 52% annual growth last year. Behind this success has been a massive and concentrated push in R&D with $6.6 billion invested in 2014 alone, putting it in the same territory as tech giants such as Amazon, Intel and Google. However, it's no longer making the inroads it did in the past due to a challenge from its compatriot OPPO which has grown at a heroic 137% between Q2 2015 and Q2 2016 to become a major global force. OPPO is hugely popular in its home market of China and has started to expand internationally into other emerging markets like India.

That "Others" segment includes former heavyweights such as Microsoft, Sony Mobile, Motorola and LG Electronics as well as newer players like TCL Communication and Lenovo.

Given the size of the mobile manufacturers' upstream (component makers) and downstream partners (the networks), it's no surprise that the market leaders in the industry also happen to be amongst the very best companies in the world when it comes to supply chain management. In 2014, Apple was listed as the best and Samsung as 7th best in the world when it came to supply chain management. This makes sense: if you want to be profitable but are being squeezed on either side by powerful component manufacturers and behemoth networks you had better make sure that your interactions with supply chain partners are optimal and that management of your inventory is world-class.

Tim Cook underlined all of this when he stated not so long ago that "inventory is fundamentally evil" in fast-moving, high-tech consumer markets. A backlog of inventories can quickly become obsolete and completely lose their value with frequent technical innovations by competitors commonplace. Much of Apple's recent success rests on Cook streamlining its supply chain and helping to reduce Apple's inventory levels. Apple gets its component parts from various suppliers in numerous countries thus reducing their dependence on any one supplier. At the same time, Apple requests that many suppliers relocate to close to Apple's factories. Component parts are transported to the manufacturer in China (Foxconn) via air so as to save on time. Foxconn is truly the ace in Apple's pack. In outsourcing manufacturing to a low-cost production specialist Apple reduces the manufacturing cycle time and allows Apple to concentrate on its areas of strength such as design and software development. Once Foxconn has manufactured the finished goods they are either shipped directly to consumers who buy on Apple's online store by Fedex of UPS or they are held at their central warehouse in Elk Grove, California until their is sufficient demand for new items at Apple's flagship stores. In shipping the product directly from China to its online buyers, Apple removes the need to get involved in distribution at all in many instances. For in-store sales, data is synchronized between the central warehouse and Apple's stores meaning goods are always available when and where they need to be. And when demand peaks Apple can quickly scale up production by hiring lots of cheap labour at Foxconn. Before Cook came to Apple the supply chain was deemed far too complex and his efforts have been focused on simplifying the whole process and reducing costs. Of course, Apple has also come in for criticism regarding labour conditions at the Foxconn manufacturing plant.

The Supply Chain

We'll take a look at three of the other main groups of players in the mobile ecosystem now and they are:

1. Component part suppliers

2. Networks/Operators e.g. Orange, AT&T, O2, Telefónica etc

3. Content producers i.e. principally app-developers

1. Component Part Suppliers

There are some very large companies involved in component part manufacturing such as Sony, Toshiba and perhaps most importantly, Samsung.

Samsung has manufacturing at the heart of what they do producing not just their own smartphones but also the component parts that go into the phones of their rivals. This strategy is contrary to Apple's for example, which outsources production (see more on that above). Samsung for example, provided the iPhone 6 with its RAM (short-term memory) and A9 Processor which runs the iOS (Apple's operating system). It used to be that Samsung's components accounted for 26% of the cost of all components for the iPhone. Because Samsung supplies so many mobile manufacturers with the components they need, they have the scale to produce their own products more cheaply. In fact, Samsung Electronics relies on component manufacturing for a great deal of its profitability with the production of its own mobiles only accounting for 32.4% of its profit with 63% coming from the components business.

Two South Korean giants dominate the production of LCD and OLED screens: Samsung Electronics and LG Display with both taking almost 40% of the market for mobile phone screens. When we look at the major suppliers of processors again we see Samsung among the biggest along with a US company called Qualcomm that few may have heard of but which generated over $25 billion in revenues in 2015. If we look at smartphone camera manufacturers again we seen big Japanese suppliers such as Sony which produced roughly 40% of all smartphone image sensors in 2014, and Toshiba.

2. Networks

Really, the main customer for the mobile manufacturers is not so much the end-consumer, but the networks. These are the buyers who purchase in bulk from the mobile device makers. They are also the companies whose infrastucture of base stations and masts mobile phones rely upon to be able to make and receive calls. To give you an idea of their size and power let's take a look at the world's top five network operators at June 2016:

Rank/Company/Country/Total Subscribers (millions)

1. China Mobile, China, 840.8

2. Vodafone, UK, 464.6

3. Airtel, India, 332.7

4. América Móvil, Mexico, 282.9

5. Telefónica, Spain, 272.6

When one considers that at the end of 2015 there were almost 5 billion mobile phone subscribers worldwide and the networks earned revenues of $1.1 trillion, one starts to understand the power of these entities. The networks also face issues relating to growth given the high penetration rate in developed markets but given their size and the complexity and cost for new entrants to enter their market they don't face the same competitive challenges the phone manufacturers face.

And here's one more graph to show you the relative size of the players in the mobile phone industry given their contribution to world GDP. The networks simply dwarf the mobile manufacturers contributing almost 6 times as much to World GDP as the device makers! The below calculates the Economic Value Added by each segment of the mobile phone ecosystem - this is the difference between sales and the direct cost of making those sales. Interestingly, content producers (principally app makers) are also now bigger than the mobile manufacturers too.

3. Content Producers

Although not strictly part of the mobile phone supply chain, app-makers now play a huge role in the industry. The evidence shows that consumers predominantly use their mobile phones to access apps. In fact, 90% of the time you see someone with their head buried in their mobile screen that person is messing around with an app as opposed to browsing the internet. This demonstrates the growing importance of app-makers. Once a periphery figure they have now grown to be massive companies in their own right. Consider that Whatsapp was bought by Facebook in February 2014 for $19.3 billion. This is a company with just 50 employees!!!


Demand for smartphones is pretty feeble at the moment with global smartphone shipments growing just 0.7% annually to the end of Q2 2016. This is largely due to the maturity of major developed markets with high penetration already evidenced in many countries. In other words, in most of the world's major markets most consumers already have a smartphone. In the graph below you can see the extent of that penetration in the developed world with 1.2 phone subscriptions per inhabitant! It seems many people in developed countries use more than one phone or sim card. Why?: to take advantage of different call plans with one being cheaper for local calls and another more economical for long-distance calls etc. Other more nefarious reasons include having an additional mobile phone to conduct extra-marital affairs or to engage in clandestine business arrangements such as drug-dealing (anyone who has seen "Breaking Bad" will recall Walter White getting into plenty of hot water with his wife over his second mobile phone!).

However, there was hope back in the first half of 2016 that demand in the second half of the year would pick up with the launches of the Samsung Galaxy Note 7 and the iPhone 7 by Apple. It remains to be seen whether that will be the case but I would be hugely surprised to see a major pick-up in demand given the disastrous battery issues that have very recently plagued the exploding Galaxy Note 7 and the underwhelming reaction to Apple's latest offering!

Yet there is growth forecast in the mobile industry. Between 2016 and 2020 the number of mobile subscribers is forecast to grow by 1 billion with 90% of those new users coming from developing markets, with India set to be the real growth driver.

The trend in recent times has been away from calls and text messaging towards internet-browsing, app usage and sharing of multimedia. More power lies with app-makers as they are the ones driving user engagement. There has been such relentless technical innovation amongst the phone manufacturers that it's difficult to make the kind of giant technical leaps that let certain phones stand out for their component superiority in the past. Pretty much all mobile phones do a good job now when it comes to calls, messaging, photos etc and since most use the same operating systems there is little to differentiate mobile phones in terms of features. Switching costs are low and only Apple has really succeeded in locking its customers in with their app store and proprietary operating system. Anyone looking to switch from Apple to another smartphone would therefore stand to lose plenty. In such a world branding also plays an important role for mobile manufacturers and again, Apple undoubtedly leads the way with a very strong brand story and high customer loyalty but there are hints in recent times that it may be losing some of its lustre.

Whereas in the early days of mobile technology the push was towards smaller devices in recent years we've seen larger, slimmer devices. This is not surprising given the change in usage patterns from being centred on calls and messages to internet browsing and app-usage, which require a larger screen for a more comfortable experience. The move towards slimmer mobile models has not been without problems however. Slimmer phones require sleeker batteries and the problem with sleeker batteries?....they require more frequent charging and heat up faster. Some of these batteries are proving inherently unsafe as Samsung well knows!

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