May 2008
Few industries are more dependent on the development and marketing of new products than consumer electronics. And few have been more prolific in this regard. Ever smarter mobile phones and high-definition TVs are just two of the more recent in a long line of innovations that have been fueling the remarkable growth trajectory of an industry that was launched with the advent of commercial radio nearly a century ago—an industry now valued at more than $600 billion worldwide.
Recently, however, the industry has been gripped by a highly uncharacteristic crisis of confidence. The cause? Widespread uncertainty about just what form the next big product breakthrough will take.
At the core of the concern is convergence. As voice, data and cable networks become Internet protocol-enabled, and content and devices are digitized, once-distinct sectors are coming together in a single high-tech ecosystem. That's good news for the consumer, of course, who will soon be able to access content at will, using small, handheld devices that jump on and off a mix of private and public networks. But convergence represents a huge challenge for manufacturers, which are battling to win the hearts and minds of consumers with just the right kind of device.
And in the developed world, those consumers are becoming both more demanding and less loyal. If the price and features are right, they won't hesitate to buy the newest must-have gizmo from copycat manufacturers located in any number of rapidly emerging economies.
What's more, a billion new consumers are expected to enter the global marketplace within the next decade, most of them from those same emerging economies. Some will be sophisticated buyers of the latest devices. But many will have different needs—phones that work in rural environments with limited energy, for example—and growing numbers of opportunistic and inventive local manufacturers will be lining up to satisfy them.
With prices for maturing products slumping, product lifecycles shortening and the battle for retail shelf space ever more competitive, manufacturers in developed markets have their hands full. As if the situation weren't already daunting enough, formidable new heavyweight competitors from other industries are entering the game. Amazon.com, for example, recently launched the Kindle digital book reader and associated online book purchasing service that competes with Sony's Reader Digital Book. Meanwhile, Google's Android—an open-source operating system for mobile phones—has the potential to have a big impact on wireless service innovation. (For a related article, see "Catching the Next Wave of Innovation," Outlook, May 2008. Also see "Driving Service Innovation in Communications, High Tech and Media: The Impact of Google's Android Platform.")
In this industry, there are two paths to high performance—and they are quite distinct. We refer to the manufacturers of the sort of breakthrough products that are such a hit with consumers that they actually create a market as Market Definers. Other companies have achieved high performance in this industry as Value Players—by delivering a customer experience characterized by a combination of product quality, brand integrity and some kind of differentiator, usually around competitive pricing or service.
No consumer electronics company has successfully embraced both approaches to achieving high performance. Our research, moreover, confirms that the two types of high performer display dramatically different mindsets when it comes to the key capability that drives performance throughout this industry: innovation. While the Market Definers tend to be more entrepreneurial, focusing on breakthrough innovation to deliver compelling new experiences with new product categories, the Value Players' principal focus is on innovation to improve their existing product portfolio with, for example, new features. They also emphasize execution and the inno-vative use of branding and distribution to extend both their geographic scope and sales volume.
The two approaches are reflected in how the high performers manage the three building blocks that underpin high performance in all industries: market focus and position; distinctive capabilities; and performance anatomy.
Market focus and position
Companies that achieve high performance as Market Definers never spread themselves too thin. They remain tightly focused on just the right market with just the right offering.
What's more, they maintain market domination by continually reviewing and improving their product portfolios, employing an adaptive growth strategy to extend only those lines that will capture new growth opportunities, and adjusting the business model to cope with new marketplace realities. Witness, for example, how Apple has migrated from the success of the Macintosh computer through the iPod to the iPhone. Add iTunes and Apple stores to the mix, and you have the fully integrated experience that today's electronics consumers crave.
Market Definers also pay close attention to customer interaction and interfaces, emphasizing innovative yet simple ergonomic design. For example, while competitors focused on hard-core gamers, Nintendo's latest video game system, Wii, was designed to appeal to the casual player. Wii has an innovative controller that combines the familiarity of a remote control with the sophistication of motion-sensing technology to translate the player's movements directly onto a TV screen. The controller can be swung like a golf club or spun like a steering wheel, making it easy for anyone to pick it up and have fun.
By using this sort of experience-based differentiation to position their products as part of an overall solution—as Research In Motion, maker of the ubiquitous BlackBerry, has done for mobile e-mail (see sidebar, below)—Market Definers succeed in locking customers in.
By contrast, the key to market focus and position for the high performers among the Value Players is value-based differentiation. They position their products as high-quality goods that have the right features and are competitively priced; they sometimes offer an additional point of differentiation, such as superior service. Moreover, the way they leverage their scale to create that differentiation—especially in emerging markets—is a crucial factor in their high performance.
Nokia is an excellent example. The Finnish company has been the leading global manufacturer of mobile phones for a decade, a position it has used to create significant barriers to entry in an increasingly commoditized market. This leverage also gives Nokia substantial cost advantages, allowing the company to command the best terms from suppliers and to achieve economies of scale in software development and marketing. With its vast distri-bution presence, Nokia can afford to develop sales channels in many markets, such as China and India, that its competitors would find challenging.
To be sure, Accenture research confirms that sheer size alone does not allow a company to achieve high performance in any industry. (For a related article, see "Is bigger always better?" Outlook, October 2004.) This is why aggressive branding and distribution play such an important role in maintaining the Value Players' global and regional dominance. Their marketing functions are globally organized, but they also have local marketing capabilities that help them build tailored, high-value and locally focused brands.
Canon, for example, has targeted India and China as growth markets. It has already started to "Indianize" its brand, signing up one of the country's most prominent cricketers as its corporate brand ambassador. In 2006, the company held a 60 percent to 70 percent share of the market in China for digital single-lens reflex cameras and is becoming dominant in small digital cameras as well as inkjet printers.
Distinctive capabilities
Market Definers are exceptionally good at turning customer insight into product and service hits. Their relentless pursuit of distinctive designs has resulted in such iconic products as Apple's iPod and RIM's BlackBerry.
What's more, their embrace of open innovation in the context of a diverse but balanced network of partners and alliances allows them to introduce product innovations in record time. The iPod, for instance, went from concept to product in just six months, thanks to a collaborative chain of expertise. Independent contractor Tony Fadell, who had worked on the concept for some time, brought it to Apple and with the company's agreement set up a team that used PortalPlayer software to develop the complete iPod/iTunes solution within eight weeks of proposing it to Apple. Fadell now runs Apple's iPod division.
Companies that have achieved high performance as Value Players take a less entrepreneurial approach. This is not to say that their design credentials are any less impressive. The design team at South Korea–based LG Electronics, whose broad product line includes mobile phones and HDTVs, has won prestigious industry awards. And Nokia has a multi-disciplinary design team that leverages the skills of psychologists and anthropologists, as well as technology specialists, to understand consumer needs.
But here, too, scale is the key characteristic of the high performers among the Value Players. Less concerned with being first to market than with ensuring disciplined execution, their design and production networks must support global product portfolios. Moreover, in the interests of delivering on their core quality, reliability and pricing promises, these companies often take a platform approach to product development.
By enabling products to share the same basic "insides" and then using embedded applications and external design to differentiate them, Value Players can accelerate speed to market and keep development costs low. They are also adept at leveraging flexible supply chains and strategic IT assets to improve sales and distribution efficiency, often using integrated IT solutions to provide real-time visibility into key operations—as Nokia has done in China (see sidebar, below).
Meanwhile, aggressive intellectual property management extends the worth of the Value Players' innovations by opening up important new revenue streams and providing opportunities to generate higher returns from R&D investments. Canon doesn't consider a project complete until it has filed the appropriate patent.
Performance anatomy
Market Defining high performers foster a culture of innovation that starts at the top and permeates the entire organization. Market Definers also scout for the best talent in their own and other industries. And they empower their employees to act like entrepreneurs, rewarding risk taking, performance and, above all, collaboration.
For Value Players, on the other hand, the most important organizational mindset is a dual focus on market making and disciplined execution that enables them to exploit new trends without compromising on product performance, usability and quality. Canon, for example, has combined lofty ambitions to become one of the world's top companies with consistent performance (see sidebar, below). The Value Players also maintain continuity by focusing on the development and promotion of leaders from within the company—the CEOs of Nokia, Canon and LG Electronics have all been with their companies for at least 25 years. Unlike the Market Definers, Value Players are not run by their founders.
It is tempting to wonder how long the Market Definers can sustain the pace of their remarkable product category creation—and to speculate that perhaps more Value Players, despite their relatively plodding image, will eventually become high performers. The future, in any event, will test the high performers in both groups to the fullest—especially as ongoing convergence draws competitors from new geographies and other industries into the fray.
About the author
Kumu Puri is a senior executive in the Accenture Communications, Media and Technology* Strategy group. With more than 10 years' experience in business strategy, including work in M&A, market entry, product/solution marketing, new service development and channel strategy, Ms. Puri currently leads Accenture's consumer technology program. In this role, she works closely with executives in the consumer electronics, media and communications industries. Ms. Puri is based in San Francisco.
*formerly Communications & High Tech
Sidebar #1
About the research From a universe of 700, we selected a group of 22 consumer electronics companies to evaluate. All boast annual revenues greater than $2 billion, are publicly traded and have a significant presence in one or more of three product segments that we believe define the industry: imaging, video and audio electronics; gaming consoles; and mobile handsets. We did not include consumer PC manufacturers—although consumer PCs are also products that clearly define the industry—because the available data did not permit us to separate the results of the consumer divisions from those of the enterprise computing businesses.
|
The industry's most successful companies have outperformed their peers across the five dimensions of Accenture's High Performance Business methodology over three, five, seven and 10 years. Accenture has divided the high-performance businesses into two distinct groups of companies based on their approach to innovation: product-focused Market Definers and execution-focused Value Players. There are significant differences between the two groups (see story).
|
|
While the Market Definers delivered shareholder returns five times greater than their peers over five years—compared with just 70 percent greater for the Value Players—their operating margins were slightly lower than those of the Value Players (11.1 percent versus 12.5 percent). These differences reflect their two very different approaches to success. However, for both groups, the margins were significantly higher than for their peers.
Sidebar #2
RIM: Master of experience-based differentiation As creator of the world's most famous mobile e-mail and data retrieval device, Research In Motion has attracted a lot of imitators. Thus far, however, the company's BlackBerry remains king of the smart phones. And it all comes down to differentiation.
RIM, indeed, has managed to stay consistently ahead of the game by adjusting its original product, now considered an essential tool by millions of corporate users, with innovations that not only lock in aficionados but also attract new users. The BlackBerry Pearl, a lighter, sleeker and more stylish version of the original device that also includes a built-in camera and digital music player, has helped the company expand from its corporate customer base into the consumer segment—a move that has helped fuel RIM's sizzling growth.
A master of the adaptive growth strategy that so distinguishes the market focus and position of this industry's Market Definers (see story), the Waterloo, Ontario-based company also leverages its proprietary operating system and software to help generate exceptionally healthy revenues. In addition to selling the BlackBerry phone itself, RIM generates revenues by licensing its BlackBerry Enterprise Server to corporate IT departments, and by managing data services on behalf of carriers such as Verizon Wireless in return for infrastructure access fees. Thus, RIM has successfully established a hybrid business model consisting of hardware, software and services.
Sidebar #3
Nokia: Leveraging a truly global presence Not surprisingly for the world's leading mobile phone maker, Finland's Nokia boasts a global manufacturing presence. It's what the company does with that network of plants, however, that really distinguishes it as a high-performer among the Value Players.
Each one of Nokia's plants is capable of producing mobile devices that meet most world standards—and that means the company can respond with extraordinary speed to the demands of different markets and geographies. Combined with equally extensive distribution channels and a broad product portfolio, this flexibility sustains the global expansion, especially in emerging markets, that has made Nokia so successful (See "Brave new world," Outlook, May 2008).
The company is No. 1 in India, for example, which by 2010 will be the world's second-biggest market for mobile devices (after China) and where Nokia enjoys a 53 percent market share. In India, as in other emerging markets, Nokia has segmented consumers according to their phone usage, income levels and lifestyles. The company aligns its products to each segment, and adapts them to local tastes and conditions. Brightly colored, dust-proof handsets equipped with built-in flashlights, for instance, come in very handy during the frequent power outages in parts of India.
Nokia also works through a network of 90,000 Indian retailers, about one-third of which sell only Nokia phones. And the company recently announced its plan to reach India's vast rural markets via "shops on wheels," using local villagers to sell Nokia phones to their friends and neighbors.
Meanwhile, Nokia uses an integrated IT solution that gives it real-time visibility into its global operations and allows the company's sales force and distributors to manage orders and track both demand and sales.
Sidebar #4
Canon: The Kyosei commitment to quality Already the world's leading maker of digital cameras and multi-function printers, Canon now aims to become one of the top 100 global companies by 2010. But the Japanese company has no intention of achieving its ambition at the expense of its legendary product quality.
Indeed, Canon has a highly distinctive corporate philosophy that sustains its commitment to quality. Kyosei, which can be defined as "living and working together for the common good," binds Canon's employees together according to the "three-self spirit"—self-motivation, self-management and self-awareness—in a tightly focused culture of disciplined execution. Together with focused market making, this sort of highly motivated culture defines the performance anatomies of all successful Value Players in this industry (see story).
In Canon's case, strong top-down leadership is helping reinforce the current production reform that drives its long-term ambition. Canon board members, moreover, build strong and stable relationships through regular communications, including morning meetings. And by assigning people who have little direct relationship with the actual project theme (and so can act in the interests of the company as a whole, rather than those of a particular division) to lead innovation projects, Canon fosters broader understanding and collaboration—reinforcing the commitment of the entire company to maintaining the quality of the brand.
Chart Section
On a roll
The $619 billion global consumer electronics industry is growing robustly with stable profitability. And it is expected to continue to do so—as 47 percent of its current market capitalization is attributable to future value.
Globally, consumer electronics is a $668 billion industry that has grown annually by more than 11 percent since 2005.
The mobile phone sector is the most concentrated, with 83 percent of sales being made by the top 5 companies.
Prices of LCD televisions are expected to continue falling, which would help drive revenue up to an estimated $116 billion by 2011.
Almost one-fourth of industry revenues are from mobile phone sales. Another 21 percent are from television sales.
The number of M&A deals in audio- and video-equipment manufacturing has almost quadrupled since 2000, with the value of deals topping more than $15 billion in 2007.
About one-fourth of industry revenues come from sales in North America.
But during the next year, more growth is expected to come from Asia, Europe, Africa and the Middle East.
Though the industry hit a rough patch in 2001 and 2002, profitability is stable at 3-4% of revenues.
Investors expect industry players* to generate 47 percent of their current enterprise value from future-growth opportunities, which means $311 billion of the current market value is made up of future value.
Understanding and navigating the complex dynamics of the industry are critical to achieving high performance in consumer electronics.
To Top