1.

Introduction
HTC Corporation was founded in 1997 and progressed, by 2009, to become the
world’s leading manufacturer of smartphones which run Microsoft’s Windows Mobile
operating system (Yoffie and Kim, 2009). The company operated in two segments
being the original design manufacturer (ODM), manufacturing smartphones for
branded handset companies and its mobile phone operator business, designing
phones for service providers. In 2006, HTC embarked upon branding phones under
its own label which was seen as a risky step by stakeholders. Despite prevailing
challenges the CEO, Peter Chou, was optimistic (Yoffie and Kim, 2009).

The discussion entails strategic actions required to achieve the goal of HTC Corp. to
become the world’s leading smartphone company in the world. An analysis of
resources, strategic capability, the environment and assessing stakeholders will be
undertaken, as well as choosing a strategy by identifying, selecting options, as
indicated in Boojihawon and Segal-Horn (2006).

2. Historical strategy of HTC

The company’s initial focus on laptops, diversified into handheld devices. HTC
employed a competitive strategy to differentiate itself through offering mobile
phone operators customized phones which initially provided better returns than the
ODM business (Yoffie and Kim, 2009). Costs for research and development to
create innovative products did indeed increase unit costs. As HTC expanded the
business through further contracts from other geographic locations and a
collaborative learning joint venture with Handspring, the company showed no
significant financial stress. At this point in 2005, HTC was satisfied with the rapid
growth and performance of the company and its associated strategy of broad
differentiation, as per Porter’s generic strategies framework cited in Viney and
Gleadle (2007). In addition, HTC’s ‘competitive scope’ was broad and may be
viewed as competing globally and across all market segments. At this stage, HTC
was not a significant competitor in the mobile phone industry. This is evidenced
with the CEO stating, in 2005, that, “We do not plan to be like Nokia or Motorola.
We try to avoid (competing) with them” (Yoffie and Kim, 2009: 4). HTC was
specializing at a specific level of the value chain employing a horizontal approach.

The phone industry, being dynamic, predicted the growth of smartphones to

comprise a third of the world’s mobile phone market by 2013 which reinforced the
need to review the strategy of HTC (Yoffie and Kim, 2009).

3. Current strategy of HTC

The CEO, questioned where HTC would partake in the expanding value chain of
phone software and the subsequent actions necessary to enable HTC to be unique
in such a dynamic sector (Yoffie and Kim, 2009). He realized that international
growth would be limiting if differentiation into branding did not occur. This new
strategy was disconcerting to investors, thereby reducing shares by half of its
earlier value. In addition, previous attempts by various other companies proved
detrimental to their respective companies.

Various competitors in the mobile phone industry, such as Nokia, maintained cost
advantages and economies of scale in component prices (Yoffie and Kim, 2009).
HTC initiated its brand strategy in 2007 in Europe and Asia, in which it had acquired
Dopod, which was well established in Asia. HTC then penetrated the Chinese
market, however due to barriers to entry into the Unites States (US) market,
challenges were encountered. HTC’s broad differentiation strategy thus became
more focused upon the high end of the consumer market, being both professionals
and consumers.

HTC invested greatly in research and development to create further product

innovation. The subsequent differentiation and innovation strategy indeed created
a shift in the industry structure as mentioned in Viney and Gleadle (2007).

In 2006, HTC collaborated with Google search engine to create a handset to work on
Android (Yoffie and Kim, 2009). This lead to reduced license fees thereby lowering
overall costs to the company. In 2007, nearing the launch of their touch screen
interface smartphone, Apple revealed its intention to launch a similar product,
which inadvertently created opportunities by familiarizing the consumer with the
product. The success of this product provided a boost to the decision of HTC to exit
the ODM business by the end of 2009. The company has thus focused upon market
penetration through the development of a successful product and directed its
resources in one chosen competitive area as cited by Pearce and Robinson in Viney
and Gleadle (2007)

HTC’s strategy of diversification evolved into an organic strategy, exploiting the

existing product and markets as per Ansoff cited in Viney and Gleadle (2007). The
company sought to expand into the Chinese and US markets which were part of the
global market penetration strategy (Yoffie and Kim, 2009). Furthermore, issues of
economies of scale in unit pricing proved challenging. Overall costs were reduced
by moving part of the value chain, manufacturing, to China, resulting in the
configuration of the value chain becoming international. In seeking overall
production scale efficiency, all is directed at scale operations (Segal-Horn, 2006).
However, for the company to become most efficient there had to be significant
relationships amongst all activities, including design, product, logistics, marketing
and sales/service. Appendix ‘A’ displays the existing and a proposed value chain.

Furthermore, efforts to control costs meant less customization as per the original
approach (Yoffie and Kim, 2009).

The choice of increased globalization of the company in marketing its own brand
was primarily ignited by technological developments in the industry as well as
deregulation, in partnering with Google, through reduced licensing payments to
Microsoft (Yoffie and Kim, 2009). Strong international competitors such as Nokia
initially deterred the organization from competing on a global scale.

4. Appropriateness of strategic choices

The strategic choices of the organization will be evaluated against the tests of
suitability, feasibility, and acceptability of Johnson and Scholes as per Appendix ‘B’,
the Rumelt’s tests of consistency, consonance, advantage, feasibility as per Viney
and Gleadle (2007). Business risks will also be identified.

4.1 Consistency
HTC’s proposed strategy to be the leading smartphone company in the world is
clearly inconsistent with it’s high-end target market. Failure to re-focus and
differentiate the product to reduce unit costs through scale economies could prove
detrimental to HTC, an arena in which competitors such as Nokia retain the
advantage (Yoffie and Kim, 2009).

4.2 Consonance
The key strategy of innovation and emergent technology is an indication of the
creation of social value, as mentioned by Rumelt, cited in Viney and Gleadle (2006).
The organization has an extensive research and development component striving to
provide more innovative products to effectively meet the demand of consumers in a
technologically dynamic industry.

4.3 Advantage
HTC is able to maintain the value it creates, superior skills and resources, which
Rumelt, cited in Viney and Gleadle (2006) indicates competitive advantage,
together with a superior position. HTC is striving towards improving their position
through the branding initiative (Yoffie and Kim, 2009). However, geographic
positioning of the organization and sufficient market penetration into US markets is
lacking in the strategy.

4.4 Financial analysis and business risk analysis

An analysis of financial ratios will be conducted as per Parkinson (2003).

A current ratio analysis was conducted for 2008 (1.86:1), 2007 (2.42:1) and 2006
(0:1). This reveals that cash was unavailable in 2006 to cover liabilities. However,
subsequent growth in 2007-2008 adequately covers liabilities.

The debt ratio indicates the level of financial leverage between 2004 and 2008,
changing from 50% to 35% in 2006 and steadily increasing to 47% in 2008 as per
HTC cited in Yoffie and Kim, 2009. Implications of the changes in HTC’s strategy in
2006 lowered the utilization of borrowed money, which steadily increased by 2008.
HTC may be at risk of bankruptcy if unable to repay debt and may also be unable to
find new lenders in the future. Furthermore, this has increased the shareholders'
return on their investment as indicated in basic earnings per share progressively
rising from 2004 to 2008 from 0.17 to 1.16. The gross margin has gradually
increased, declining slightly in 2008. Of concern is the return on sales declining
from 24% in 2007 to 19% in 2008, suggesting that HTC has not recovered from the
strategic changes instituted.

A Sensitivity analysis may reveal the effect of exchange rates and the global
economic recession on outcomes.
The attractiveness of the company to shareholders was displayed in the change in
strategy to create its own brand. Shareholders, considered risks involved as being
ultimately detrimental to the company, thus reducing shares to 50% of its earlier
value in 2006/07 (Yoffie and Kim, 2009). Share prices subsequently rose, stabilized
and dropped during the economic recessions of 2009.

A cost benefit analysis considers a greater group of stakeholders including

environmental activists who may be concerned with the effects of manufacturing
and insufficient recycling associated with the product. In reducing costs by moving
manufacturing to China, one may consider that impact to the environment was not
considered.

5. Corporate Strategy
Diversification is a key element in corporate strategy (Viney and Gleadle, 2006) and
highlights a move away from a single industry and a relationship with other
organizations, which HTC has indeed accomplished with Google.

6. Conclusion and recommendations

• Lack of economies of scale in unit production proved challenging for HTC. The
move of part of the value chain to China, reduced overall costs to the company.
However, due to the target market being the high-end smartphone products, the
company needs to review cost production and further reduce costs in light of the
economic recession. To become more competitive the company would need to
consider subsidiaries in other countries and further integration. From being an
international organization, HTC would need to consider becoming transnational. As
per Bartlett and Ghoshal cited in Segal-Horn (2006), assets and capabilities would
be dispersed and interdependent, overseas subsidiaries would be differentiated and
national units integrated with worldwide operations to suit the relevant markets. In
addition, knowledge could be developed and jointly shared. Please refer to
Appendix ‘A’ as per previous discussion.
• As per Ghoshal’s organizing framework cited in Segal-Horn (2006), to
effectively compete in the worldwide market, HTC must expand and exploit
potential scale economies in each activity, balance scale with strategic operational
and strategic flexibility and benefit from experience by innovation and reducing
costs.
• If the prediction of eMarketer cited in Yoffie and Kim (2009) is correct, by 2013
smartphones would represent more than a third of the world’s mobile phone market
and by 2012 mobile internet penetration would be 30%. Consequently, HTC will
need to penetrate a broad consumer market and simultaneously create further
partnerships in order to sustain its advantage over competing smartphone
manufacturers, through the current successful association with Google.
• One of the core competence areas is the users’ experience, which reveals an
80% customer satisfaction rating of HTC products.
• An industry analysis (Appendix ‘C’) reveals a lack of differentiation in the
industry for price with customer preference being functionality (Mcafee, 2009). As
brand name is a major deciding factor, HTC has to continue to market the brand. As
the industry supports multiple firms due to the ability to differentiate between
business and casual users, but does not support a large number of smaller firms,
the industry is very rivalrous as competitors wrestle to become one of these few
firms. Consequently, HTC needs to differentiate into the casual user market and
reduce unit costs, expand through partnerships and continue to be innovative to
secure itself as the leading smartphone company in the world.
Strategic evaluation of HTC using the tests of Johnson and Scholes

4.1. Suitability
The new strategy proposed by the CEO of HTC chiefly focused on branding and
marketing handsets under its own name. Key success factors identified are
emerging technology by investment in research and development technologies,
brand marketing, skill and capability in design and innovation, efficient distribution,
user support, customization to target various market segments, corporate ventures
with various global operators and collaborative learning partnerships with
organizations such as Handspring (Yoffie and Kim, 2009). The structure
characterized by an open work environment encouraged creativity and innovation
thus effectively utilizing capabilities and resources. One identified weakness is the
lack of scale economies leading to higher unit pricing and potentially less
customization.

4.2 Feasibility
The organization may possess the resources from investors to implement the
branding strategy. It is, however, questionable that HTC will be able to fulfill the
vision of being the leading smartphone company in the world. The new branding
strategy caused investors to temporarily retreat (Yoffie and Kim, 2009).
Nevertheless, the organization currently possesses the potential to raise sufficient
capital. In addition, HTC now has to consider operational issues arising from being a
brand name, such as support services, sales and marketing. Furthermore, current
leverage through association with Google, has created a more effective product,
which is not sustainable in the long term. Alternatively should HTC be able to
reduce prices and review its target market, further competition is inevitable. The
implementation of the overall strategy arising from this vision is nevertheless,
arguable.

4.3 Acceptability
This criterion focuses on stakeholder’s perceptions of the results of the strategy
according to Johnson and Scholes, cited in Viney and Gleadle, 2006. This pertains
primarily to regulatory, environmental and fraud risks, profitability, ethics, reward
and relationships. In accordance with these factors and attaining business
objectives, HTC has steadily increased stakeholder value (Yoffie and Kim, 2009),
and has effective business units to administer risks and opportunities posed by
economic, social, human and environmental capitals. Stakeholders should thus be
reasonably satisfied.
APPENDIX ‘C’

Smartphone Industry Analysis using Porter’s five forces

Adapted from Mcafee, 2009

Entry Barriers
Numerous barriers prevent entrance into the industry. Amongst the largest are:
• fixed costs – necessary research and development
• reputation of firms – people purchase from companies they trust
• networking – consumers purchase phones used by others
 • switching costs – switching phones and service are costly
• differentiation – limited capability to differentiate from other phones

Bargaining Power
Smartphone companies have relatively weak bargaining power. Certain factors
include:
• substitutes – several substitutes
• elastic demand – smartphones are not essential products
• information – customers research capabilities of smartphones because of price
and high product reliance
• differentiation – little differentiation from competitors
• switching costs – few incentives to switch phone companies

Substitutes
There are numerous substitutes for smartphones which are mainly used for mobile
access to information. Substitute products are cellular phones, laptops, organizers
or pagers. Significantly, cellular phones and laptops adequately provide the
services required by the majority of consumers in terms of mobile access to
information.
Complements. Any application that works well with the smartphones is a
complement. These include e-mail, data manipulation applications, maps and GPS,
organization applications, various internet applications and essentially any software
available on phones. Music and media content, computers and travel products are
also complements.

Rivalry
Rivalry is rife in the smartphone industry and despite a few strong competitors, the
industry does not support many organisations. This is due to:
• Differentiation – limited ability to differentiate a smartphone despite much
differentiation between casual and professional users for smart phones. This
permits multiple firms to exist relative to total number being small.
• Networking – People purchase products others use
• Software may be less expensive service between the same phones. Software
compatibility is also an advantage.
• Economy of Scale – minimal scalability to create more software, not directing
market to a small number of firms.
• Prices – Customers generally value quality significantly over price when
purchasing a regularly used product. Also pricing is similar and not important in
comparison to the usefulness and amount of time customers will use the phone.
Consequently, there is limited differentiation for price, and companies with
perceived low quality and low budgets for research and development will
deteriorate.
• Brand Name – consumers wish to purchase from the popular or reliable
company, hence limiting existence of multiple small firms.

As such the industry supports multiple firms due to ability to differentiate between
business and casual users, but does not support a large number of smaller firms.
The smart phone industry is very rivalrous as competitors fight to become one of
these few firms.