Xelibri

1. Case study: Xelibri- a Siemens mobile phone adventure.
Mat No. 06009377
We will use the PESTEL model in order to help get an understanding of the factors
affecting the wider environment and how these might impact on the mobile phone
industry and hence Siemens. Michael Porter’s five forces model is used to assess the
extent of competitive rivalry in the industry and how they affect the company under
consideration. Internal appraisal is carried out along the lines of identifying threshold
resources and threshold competences, and unique resources and core competences.
PESTEL
The PESTEL model ( political, economic, social, technological, environmental, and
legal ) helps us to understand the forces at work in the wider environment of an
organization, not just by listing them, but by also helping to identify the driving forces
of change in that environment.
The most significant Political influence on the mobile phone manufacturers’ industry
has been the deregulation and liberalisation of most telecommunications markets. The
increase in customer base of the network operators meant that the handset
manufacturer had to also increase capacity in order to match up the demand for
handsets. “Until 2000, many handset makers ramped up immense production
capacities themselves” (Xelibri case study). Such a political move obviously meant
that those companies with the necessary capacity or who had the finance ready to
expand their scale could take advantage of the boosted customer base.
Another key influence that politics is having is driving the speed of globalisation.
More and more countries and therefore markets are being globalised. There is the
drive towards technical convergence of standards. Many governments now seek to
encourage big operators to base operations in their country and this trend is
encouraging the market globalisation and cost globalisation. This trend exposes all
businesses to increased competition from abroad, and hence need to be cost efficient
or be able to match up with a high quality.
Economic circumstances also have a direct impact on the environment, and the likely
factors that might impact on the mobile phone manufacturing industry are business
cycles, disposable incomes and GNP trends. The country data in the case study
reveals that countries with a lower GDP per capita have a very low percentage rate of
mobile phone penetration. The likes of China and India have a penetration rate of 12%
and 1% respectively. For most rich countries the penetration is nearing saturation. As
GDP per capita starts to rise in the poorer countries, there is a tendency that demand
for mobile phones would increase, given that everything stays the same. Also during
times of boom there is the natural expectation for sales volumes to grow along with
the economy and vice versa. The company must be able to reasonably work out when
the next cycle starts to turn so that it doesn’t get caught out.
Social trends also affect the sales and hence the manufacture of mobiles. When new
products come to market, first-time adopters get to use them first and gradually the
whole society might follow the consumerism trend. It has become almost a necessity
to carry a mobile phone these days compared to when it was regarded as a status
symbol, in the early 1990s. Such trend in consumerism is driving the market to
saturation in the developed (rich) countries and leaves a great potential for markets
where the trend is yet to catch-up.
1

2. Case study: Xelibri- a Siemens mobile phone adventure.
Mat No. 06009377
The mobile phone manufacturing business is highly technologically driven, with
innovation gap times just lasting a few weeks as mentioned in the case. Here the
speed with which a manufacturer can bring to market a new product is very
paramount. Things do go obsolete in a short span of time in this environment and it is
up to the company to stay ahead through research and development. Managing stock
levels properly so as not be left with a warehouse full of obsolete equipment. Siemens
mobile division wrote-down assets in the year 2001 particularly for excess hand-set
inventories.
Environmental factors that might impact on the manufacturing of mobile phones are
the increasing intensity of the debate about energy conservation, and their safe
disposal. Whilst that debate goes on, there is a radical move to cut back on energy
consumption through ‘green’ taxes. This may impact on the phones industry if
governments start pushing for more energy efficient phones. We might even need to
consider the possibility of future legislation in some solar-abundant countries that
requires mobile phones to be solar- chargeable. Whether it is new legislation or
demand for energy efficiency, there are implications for research and development
expenditure.
All businesses have legal conditions to fulfil in order to continue in business, for
example adherence to employment law, health and safety standards, and product
safety. For electrical equipment manufacturers, such as mobile phones, product safety
is a very important factor. There would be technical standards to meet, such as
voltage, fire risk assessment of batteries, a stipulated maximum acceptable level of
radiation from phones and other issues. We also need to consider the extent to which
environmental issues could lead to enactment of new laws.
The analysis of the macro- environment using the PESTEL framework shows the
technology and political influences are the main drivers of change in the mobile phone
manufacturing business.
COMPETITIVE FORCES INFLUENCING THE INDUSTRY
Michael Porter’s five forces model is applied here to analyse the competitive forces at
work in the mobile manufacturing industry. Porter identifies five key factors that
determine the extent of competitiveness; potential entrants; suppliers; buyers;
substitutes; and competitive rivalry. The weaker the forces, the less competitive, and
hence the more attractive the industry is.
There is a sense of strong supplier power in the industry. Shepherd gives the example
of consolidations in the supplier sector through strategic alliances such as between
Casio and Hitachi in 2003(cited in Johnson et al, 2005, p83). Such alliances and the
fact that original design manufacturers are not many in the market make suppliers
powerful. For most technology companies relying on micro-chips and software from
established suppliers, there could be a high switching cost.
Buyer power is also very strong. The strategic customers of the mobile phone makers
are the network operators and big retail outlets. These network operators are huge and
tend to define prices and functionalities of phones. The case clearly emphasises that
for a manufacturer to lose an operator spells a huge loss and gains for competitors
since they must rely on high volume sales in order to recoup their investment in R&D.
2

3. Case study: Xelibri- a Siemens mobile phone adventure.
Mat No. 06009377
There is no sign of their (network operators) dominance slacking since phone users
prefer to buy a bundled package at subsidized prices than to buy direct from electronic
retailers.
The threat of substitution came from ‘technological regression’ as used by Jill
Shepherd (cited in Johnson et al, 2005, p83). The high mobile call charges in the early
1990s resulted in a number of users reverting back the fixed line phones. There is no
real threat from substitutes such as the internet, ISDN lines, and facsimile machines.
In today’s world where everything is going wireless, the worse that could happen to
mobile phones are feature enhancement and design reengineering- example, mobile
phones combined with PDAs.
The threat from new entrants is not deemed strong. To be a player in the phone
making industry requires a huge capital investment. To make the investment
worthwhile, the manufacturer must expand quickly to gain critical mass so as to keep
its unit cost base low. Again the strength of both buyers and suppliers in the industry
means that margins are small, for example Siemens mobile division making 0.9% and
-2.% EBIT margin in 02 and 01 respectively, which might not make the industry
attractive enough. However, there could be an entry into the market from the original
design manufacturers as Samsung did.
Competitive rivalry in the industry is quite significant. For an industry to be deemed
rivalrous, Johnson et al (2005) give a few pointers, some of which are; the extent to
which competitors are in a balance; the growth rate in the industry; high fixed costs;
and high exit barriers. In the mobile phone making industry, all the pointers are rife.
Nokia is exceptionally big at 36% of the market size, but the other key competitors
are not dissimilar in size. In such a situation there is high competitive rivalry as one
player hopes to jolt the next player above out of the way with some effort. This is why
Siemens mobile division seeks to establish itself as one of the top two players in the
market. The market is also saturated in developed economies and hence one
competitor can only expand by getting market share away from a competitor.
OPPORTUNITIES AND THREATS
Globalisation is an opportunity for the Siemens mobile division. Market globalisation
and cost globalisation means that the division can sell more and more phones in
international markets as well as source its inputs from low cost destinations or even
relocate to such places as China and India. The low mobile phone penetration rate in
low income countries such as China and India is also an opportunity to grow sales as
incomes increase in those economies.
The mobile phone manufacturer now outsources a great deal of work to original
design manufacturers (ODM), with regard to its Xelibri operation. These ODMs,
armed with the technology and experience of production can then set themselves in
competition against their former clients. This could leave the Siemens manufacturer
without an alternative source of supply and hence business would suffer.
Globalisation is again a threat as it is an opportunity. Far eastern countries are able to
produce cheaply at the same time offering reasonable quality. This would undercut the
western producers who comparatively have a higher cost base. The evidence being the
rate at which local Chinese manufacturers grabbed market share from Motorola.
3

4. Case study: Xelibri- a Siemens mobile phone adventure.
Mat No. 06009377
INTERNAL APPRAISAL
Threshold resources are tangible and intangible and are the basic resource requirement
needed in order to be in a market. Tangible assets are things like finance, human
resources, plant and equipment, whilst intangible resources could be brands, patents
and customer databases. Siemens mobile is the fourth biggest player in the phones
market and therefore one would expect it to have the necessary finance needed.
Technologically, the Siemens group has long been established in electronics, radio
transmission and medical equipment. This puts it in the position of having the know-
how and infrastructure in the phone business. The division has also got its human
resource needs in place, with the new Xelibri brand drawing to it over forty
employees from different nationalities and backgrounds.
The Siemens mobile phones division has got threshold competences in the
engineering and technology side. The Siemens phones are said to be regard as symbol
of German engineering skills.
Companies can develop core competences on the back of some unique resources they
have. The unique resources that can be identified for Siemens mobile are its global
brand name and GSM patents. These unique resources allowed Siemens to exploit
market share until it slipped from being number three in 2001. The division could also
build core competence in marketing if it uses the Xelibri approach. In the Xelibri
segment, everything would be outsourced except the marketing side. Marketing would
mean building strong relationships between ODMs, Design and PR agencies in ways
that are not easily imitable by its competitors.
STRENGTHS AND WEAKNESSES
The Siemens mobile phone is a global brand name. It was number three player in
2001, which says a lot about peoples regard for it.
The Siemens phones have a reputation of being associated with German engineering
skills. This adds to the company’s global brand name.
The way in which five sub-divisions are set up under Information & Communication
Mobile means that they could support each other hence giving synergy. For instance
Solutions and Networks could support the Mobile phone division, whilst Wireless
Modules and Cordless Products also exchange ideas with the Mobile division.
The company shows some apparent weaknesses in its technology led approach to
phone making. The company has originally ignored design led suggestions as well as
what customers really wanted. The company only positioned a model to target a
particular market segment only after the phones had been made. In effect, dwelling on
its engineering prowess could be seen as core rigidity. Competences need to be valued
by customers and the ‘Mobile phone purchasing reasons’ exhibit shows that there are
other important factors other than technology, such as price and design, which
influence demand.
The company is set to start the Xelibri operation which is to use proven technology
and to use the same core technology put on a modular platform. This is intended to
4

5. Case study: Xelibri- a Siemens mobile phone adventure.
Mat No. 06009377
help keep scrap out of the value chain by transferring unsuccessful launches onto the
subsequent launch. It is however noted in the case that only one network standard
could be covered in the first two collections when the modular technology platform is
used.
The Siemens division does not have brand credibility in the fashion world where it is
trying to make an impact. Again, only marketing would be retained by the Xelibri
operation and everything else outsourced. This means that all learning curve
experience opportunities would be lost to the external suppliers.
POSSIBLE FUTURE STRATEGY DIRECTIONS
The company has once considered the prospect of withdrawing from the mobile
making business. That strategic option may however be revisited at a later date as the
phone industry continues on its path of saturation and if the Xelibri project does not
take off well. It is also observed that the five forces are strongest in competitive
rivalry, supplier and buyer power.
Using Ansoff’s matrix, the Siemens mobile phone division could look at market
development and product development options.
The opportunities offered by globalisation means that the division can look at actively
establishing market presence in the Far East and other low income countries where the
phone penetration rate is low.
Product development is also a possible direction it could take. The division can look
at starting new products such as in computing, backing it up with its rich knowledge
in wireless technology and networking. Laptops with wireless connectivity and hand
held computer mobile phones could be developed for its existing customer base.
5

6. Case study: Xelibri- a Siemens mobile phone adventure.
Mat No. 06009377
Part 2: EVALUATION OF THE MODELS USED
The PESTEL model helps corporate mangers appreciate factors in the macro
environment which might impact on the businesses they run. It encourages
management to be forward looking at all times, trying to anticipate future trends in the
environment before they happen. The usefulness of the model is however
questionable if it is only seen as an exercise of listing down factors. Whilst it could be
easy to identify the key drivers of change, it is not be easy to assess their future
impact with any certainty or accuracy.
Porter’s five forces model helps analyse the factors at work in the immediate
environment of the company in question. This framework helps corporate managers
assess the attractiveness of an industry in which they are, or one into which they want
to enter. Companies are able to scan their industry in order to develop strategies which
might help them gain competitive advantage over their rivals. However, Porter’s
approach to analysing the competitive forces is deemed to follow a rational approach
to strategy. For reasons such as lack of information, time constraints, and uncertainty,
Herbert Simon believes that managers settle for what he calls ‘limited or bounded
rationality’. This means that managers are in no position to rationalise all their
strategic options- they look for options which are tolerably satisfactory. In today’s
world also, suppliers and buyers are seen as partners of companies rather than in some
sort of power play with companies like Porter makes it seem.
Finally, the SWOT analysis is that model which brings together all the information
gathered about the environment and the firm’s own internal capabilities. It looks at the
adequacy of the resources and capabilities available to the firm in counteracting the
threats, whilst taking advantage of the opportunities arising. SWOT analyses are
meaningless without a comparator. It is difficult to identify a competitor’s strengths
and weaknesses with any accuracy and hence a distorted comparison may result. The
external environment is also very dynamic in the real world, making collection of
relevant data for assessment a problem. As different strategists scan the same
environment for their SWOT, the same information is being picked up and hence
similar strategies could emerge with competitive advantage gained. In this situation,
the whole SWOT process would have been a waste of time.
6

7. Case study: Xelibri- a Siemens mobile phone adventure.
Mat No. 06009377
Reference
Book
1. Johnson, G. et al. (2005) Exploring corporate strategy: Text and cases 7th
ed.
FT/ Prentice Hall.
7