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Study of Vertical Integration for

Apple and Samsung in Smartphone


Industry
Submitted To:
Prof. M. Akbar

Submitted By:
(Group 3, Section-B)
WMP09059 Abhay Vig
WMP09064 Alok Mishra
WMP09070 Arun Kr Sharma
WMP09079 Gaurav Bhati
WMP09097 Prateek Raizada
WMP09109 Shweta Rastogi

Agenda
Vertical Integration
Smartphone-Industry Analysis
Samsung
Apple
Competitive Advantage Apple Vs Samsung
Historical Financial Analysis
Scenario 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

Smart Phone Industry Analysis


Threat of New Entrants (Low)

Bargaining Power of
Suppliers (Low) for Apple &
Samsung

High capital requirement for


operations.
High R&D Cost to stay competitive
Strict Patents
Need to establish a competitive
brand

Bargaining Power of Buyers


(High)

Internal Rivalry (High)

Samsung is its own supplier for


most components & raw materials
Apple is also moving towards chip
designing to reduce power of
suppliers

Concentrated Industry 03 largest


players make up 44% market
share.

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

Buyers benefit from high industry


competition
Access to market information

Industry Dominance
Smartphones: Leading Companies by % Volume
Share 2010-2013
Global Brand Owner
(GBO)
Samsung Corp

4year 201 201 201 201


trend 0
1
2
3

12 19 28 31

Apple Inc

17

17

17

15

Lenovo Group Ltd

Nokia Corp

25

12

LG Corp

Sony Corp

Huawei Technologies
Co Ltd

Yulong Computer
Communication
Technology
(Shenzhen) Co Ltd

Samsung

Samsung Electronics
Flagship company of Samsung Group
Contributes 70% revenues of Group
195 Subsidiaries world-wide

Consumer
Electronics

63 companies for making components for its


subsidiaries
Manufacturing of Home appliances

In-Home
Consumer
Electronics

Portable
Consumer
Electronics

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

Biggest Manufacturer of Memory Chips and


Semiconductors
3 Major Divisions
Mobile Division
Consumer Electronics Division
Semiconductors Division

Digital TVs

Wearable
Electronics

Smartphones

Samsung Mobile Division Evolution

Ultimatum
Produce mobile
phones
comparable to
1993-96
Motorola

Galaxy S Launched
2012- Worlds largest
cellphone maker
2010
1998

A Humble
Beginning

Android
Era
Go Global

New
Management

1983-93

Future
Tizen?

Focus on
Component
Manufacturing

Mobile Division Started


1988 First Mobile
launched
- Low quality
perception

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 Supplier


Rank/company
1 Sony
2 Apple Inc.
3 Dell
4 HewlettPackard
5 Verizon
Communication
s
6 AT&T Inc.

Samsung's largest clients (Q1 2010)


Part description
DRAM, NAND flash, LCD panels, etc
AP (mobile processor), DRAM, NAND flash, etc
DRAM, flat-panels, lithium-ion batteries, etc

% of total sales
3.7
2.6
2.5

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

2.2

Handsets, etc

1.3

Handsets, etc

1.3

Major supplier to its Rivals such as Apple


Supplies LCD Panels to other TV manufacturers
Primary phone component manufacturer of Apple
3% of Samsungs 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
Companys 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 Incs 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.

Apple
Hardware
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 Apples 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

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 Apples 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 its 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