Competitive Characteristics of the MP3 Industry - Essay Example

?The MP3 Player Industry What are the dominant strategy-shaping economic and competitive characteristics of MP3 industry? The article of Louis Marino was talking about the MP3 player industry in 2005 and not about MP3 music industry. Thus, I will be talking about the MP3 player industry. There were at least four characteristics of the MP3 player industry that were shaping the dominant strategy in 2005. First, there were over 100 companies manufacturing MP3 players as of end 2005 but only about 7 firms were considered most important (Apple, Archos, Creative, Dell, iRiver, SanDisk and Sony). Second, the industry has been dominated by Apple because the company garners from 65 to 80 percent of the market share. Third, technological leadership appears to be a major determinant of who leads in the industry. Marino pointed out that “MP3 player manufacturers were continuously working to develop players that were physically smaller, with larger storage capacity, a longer batter life, and a simpler user interface” (p. 2). Fourth, electronic devices have been converging. As pointed out by Marino, “ combinations of cameras, MP3s, personal digital assistants (PDAs), and even cell phones were becoming abundantly popular” (p. 3). This means that even the MP3 player industry can disappear with the emergence of a product the combines the cellular phone, MP3 player, camera and personal digital assistants. In view of this, it can be asserted that the basic competition in the MP3 player industry is a fast, seamless, efficient and excellent transformation of each MP3 player firm into a firm producing a product that integrates the features of a camera, cellular phone, MP3 player, personal digital assistant and other electronic equipment into a single device. For instance, one device that has been integrated recently into such a device is the GPS locator or the device that identifies one’s exact location on earth in terms of latitude and longitude. Varian (2010, p. 523) defines a dominant strategy as the “one optimal choice of strategy for each player no matter what the other player does.” Varian (2010, p. 523) elaborated that “if there is a dominant strategy for each player in some game, then we would predict that it would be the equilibrium outcome of the game.” Varian (2010, p. 536) said “a dominant strategy equilibrium is a set of choices for which each player’s choices are optimal regardless of what the other players choose.” Similar with the Varian (2010) definition, a popular definition of dominant strategy is by Michael Shor. According to Shor (2006a), “A strategy is dominant if, regardless of what any players do, the strategy earns a larger payoff than any other. Hence, a strategy is dominant if it always better than any other strategy, for any profile of other players actions. Depending on whether “better” is defined with weak or strict inequalities, the strategy is termed strictly dominant or weakly dominant. If one strategy is dominant, then all others are dominated.” In general, the dominant strategy can be a Nash equilibrium. According to Shor (2006b), Nash equilibrium “is a set of strategies, one for each player, such that no player has incentive to unilaterally change her action.” Among several possible dominant strategies, a Nash equilibrium is one possible dominant strategy in the MP3 Player industry. 2. 5 Forces of the music player industry and which one is the strongest? The idea of five forces shaping the industry came from Porter (1985). According to Porter (1985, p. 5), the five forces any industry are rivalry among firms, bargaining power of buyers, threat of new entrants, bargaining power of suppliers and threat of substitute products or services. Like in any other industry, the same five forces are shaping the MP3 player industry although Hunger and Wheelen (2011) has identified a sixth which consists of the other stakeholders. According to Hunger and Wheelen (2011), these other stakeholders include governments, local communities and groups that can influence industry directions. Following the Hunger and Wheelen (2011) perspective, the strongest force is the one that reduces profits or the threat while the weakest force consists of the opportunities. In my view the strongest force is the threat of new products and services. This view coincides with the notion of the strongest force of Hunger and Wheelen (2011). I consider that the threat of new products and services to be the strongest force because I believe that this is the same force that is forcing the demise of the MP3 player industry in the same way that Sony’s walkman devices disappeared from the market as a result of newer and better products in the market. That there is rivalry among firms is clear in the Marino article. As pointed out, there were seven firms that are most significant in the industry although there are over 100 firms. Standard economic principles say that if firms are price makers (or that they can influence prices), the market is not perfectly competitive. It is tempting to classify the market as a market that tends to be oligopolistic because there are seven firms that are most significant in the market out of more than 100 firms. However, another way of describing the market is that monopolistic competition exists. A monopolistic competition is a market in which there are many sellers but each manages to differentiate its products from the other by attributing a certain quality or by associating that product with a particular technology or access to other products. As for the bargaining power of consumers, we can say that no particular group of consumers control the industry. However, the consumers in the MP3 players market are consumers as well of the product substitutes for MP3 player. The consumers of MP3 players are usually highly literate, moneyed, educated and have strong tastes for computers, cameras, personal digital assistant, GPS (or geographic position system) locators, and other devices which tends to integrate what the MP3 player can do into their own products. Thus, while it would not be the intent of consumers to bargain against the MP3 player industry, they would practically do so as they use products like cameras and cell phones that have integrated what the MP3 player can do into their own products. With regard to threat of new entrants, this is always a possibility because of the relatively small capital required to put up an MP3 player manufacturing firm. This is so because the technology for MP3 players is relatively standardized [see Salvatore (2010) for a discussion on the product cycle theory and notion of standardization in any product]. Yet, at the same, because of device integration, the new entrants are actually coming from manufacturers who have integrated several devices. The threat posed by suppliers of inputs to the MP3 player industry is probably non-existent. Although we lack hard data on this, it seems plausible that parts for the product are produced en masse (mass produced). In contrast, the role played by new substitutes is very powerful such that to this day, the trend among consumers is to use integrated devices like cell phones for their camera as well as their MP3 players. Others use their laptops, tablets, desktops, and flash drives as MP3 players. 3. Are the changes acting to make the industry more or less attractive from a profitability standpoint? On whether the changes are acting to make the industry more or less attractive from a profitability standpoint, the broad answer is it would depend on the strategy used by the firm. If the firm fails to adopt and insisted on maintaining the product as is or ignoring that the consumers in the industry are preferring devices which integrates devices and are no longer preferring MP3-alone devices then the firm who fails to keep up with the times will encounter profitability losses and will eventually demise from the industry. In contrast, if a firm has recognised the condition that consumer tastes have evolved into a preference for devices that integrated multiple devices then the condition can be treated as an opportunity. First, there are a number of devices that can be reconceived and redesigned to serve also as MP3 players. Second, from the devices that are possible to integrate, several combinations are possible. In other words, several products can be created from the combinations possible with devices. Third, consumers in the market can be divided into market segments which can be anticipated to prefer a particular combination of devices. For example, there can be personalities among the consumer who would prefer a combination of only the camera and MP3 player and there can be consumers who would prefer a combination of the camera, MP3 player and the cellular phone. That those who to integrate devices profit and those who do not had been able to sustain profitability is the theme of the article of Abel (2008). In the accounts of both Marino (undated) and Abel (2008), the first firm to have invented the MP3 player appears to be the Saehan Information Systems who introduced the MPMan in February 1998. The other firms who were the first to be in the MP3 players market were Pontis Electronics, Diamond-RIO, HanGo Electronics, I2Go and then Apple. Saehan Information Systems failed because, according to Abel (2008), the company failed to recognize the value of brand recognition and has weak marketing and “no experience with consumers products” (p. 1). According to the same Abel (2008) material, Pontis electronics lost because it was unable to keep up with the cost of product development that led the company to have financial difficulties in 2002. Diamond-Rio failed because of lawsuits and as new firms cut into its market share (Emerald Group Publishing Limited 2008). HanGo Electronics withdrew from the market because it was not able to keep up with the competition pertaining to MP3 player capabilities. I2Go failed because its selling price was too high. In contrast, according to Abel (2008), Apple succeeded because the company “identified and solved the major problems with existing MP3 players---size, storage capacity, user interface and shortage of legally downloadable music” (Abel 2008, p. 2). According to Abel (2008, p. 2), Apple’s success is due to “vertical integration” as “Apple designed all three components in-house, the music store, the player and the juke box software on the computer worked together seamlessly.” Thus, Abel (2008) reported that with the integration, Apple’s fortunes “rose from $5.4 billion in 2001 to $19.6 billion in 2006, while profits rose from $25 million lost to $2 billion profit.” In contrast, other companies did not perform as much as Apple. In other words, the company (Apple Inc.) who was able to execute a “vertical integration” (using the terminology of Abel) or implement the integration of devices (using the term of Marino) are the ones who have managed to perform well in the MP3 Player’s market. 4. Key success factors of the MP3 industry. Describe your strategic group map. How do the maps compare for the hard-drive-driven and flash based players? Who is in the strongest and weakest position( illustrate with the graphs) As pointed out by the Marino, “all MP3 manufacturers, however, realized that their continued success depended, in large part, on how well they could satisfy their current customers as well as their ability to attract new ones” (p. 5). Marino continued that “research showed that most buyers shopped for players on the basis of song capacity” (p. 5). Marino also pointed out that “Apple’s success had proved that many consumers were willing to buy a premium for some perceived benefit, whether it was higher quality, more technological sophistication, or greater ease of use” (p. 5). According to Marino, “industry experts predicted that as competition and rivalry become tougher, price would likely play a more central role in the buyer’s decision” (p. 5). This is fully consistent with the product cycle theory because after a series of innovation and the product standardize in that mass rather than relatively customized production rules the industry, comparative advantage transfers from the innovating to the imitating country who can produce the product cheap, cheaper or cheapest (Salvatore 2010). As pointed out earlier, those that succeed in the industry are those who are able to identify and address what consumers want: size, storage capacity, interface and source of legally downloadable music (Abel 2008). Thus, based on this, the firm who are able to address the concerns mentioned are those that are able to succeed. Abel calls this as vertical integration while Marino calls the same as device integration. Given this point, it follows that the firms who are strongest in positioning themselves in the hard-drive-driven and flash-based players are those who are in a better position to succeed in the industry. The hard-drive-driven and flash-based players also represent a degree of device integration or vertical integration, depending on whether we use the language of Marino (undated) or Abel (2008). The players in drives or flash-disks are the ones who are among in the best position to integrate themselves with various devices and play the media and content integrated in the devices. Given this point and based on the Marino discussion, the firms in the weakest and strongest positions are as follows: Big Firm Size Archos, I River Rio Sony Small Firm Size Degree of Positioning in Hard-Drive and Flash Drive Players: Weak Strong The foregoing figure merely emphasise that Apple, Dell and Creative appear to be the leading firms based on their size and capability of their products... Based on the Marino data, out of the seven most significant firms in the MP3 player industry, Apple has the strongest industry position followed by Dell and Creative. The firm which is most weakly positioned is hard to determine among the seven. It is difficult to identify the company with the weakest position because it is possible that by differentiating market, a firm is able to position itself in one market segment while the other firms can position themselves in the other market segments. 5. What strategic moves Apples rivals might take to attract buyers and cut into Apples sales of IPO? What will be the implications of implementing such strategies for those rivals? There are at least three ways to cut or break into the market share of Apple. The first way is to copy the Apple’s formula for success. As pointed out by Abel (2008), the Apple formula for success included recognition of the importance of brand recognition and vertical integration. The vertical integration included making sure that several components are in-house (music store, the player and jukebox software). On the other hand, Marino highlighted the importance of integration of devices or making innovations such that many devices (example: camera, phone, GPS locator, personal digital assistant devices, etc.) are covered by a single device that also functions as an MP Player. The MP Player functions like a Swiss Knife in electronic devices. This can include looking into the sales potential of flash drive or a USB device that can automatically function as a player or a device. Further innovations can be made so that the USB can serve be attached to several devices or can be made to operate on its own and independently. As implied, the first way would have to involve technological innovations. A second way to cut or break into the market share of Apple is to identify market segments in the market and designed product appropriate for each market segments. For instance, one market segments can involve a focus on popular music. The other market segments can focus on classical music and several other market segments can be made that focuses on each type of music. Another market segment can involve the market segment of composers or those in composing music. There are also market segments that can be associated with a profession or perhaps even market segments differentiated based on vulnerability to diseases. Not all of the devices, for example, have equal relevance to professions and a bundle of devices can be integrated with the MP3 player to create several market segments in the MP3 player market. This would imply creating a range of products concentrating on a range of market segments not covered by Apple. A third way to cut or break into the market share of Apple is to implement a brand image that is distinct from Apple. This is hard to define at the moment and to move forward a workshop among the workforce may be needed. This is different from the first in that the first merely apes or copies the strategies which made Apple a success. In contrast, this strategy seeks to identify a brand image that is different from Apple. The third route is different from the second in that the second route divides a market into various segments while the third pertains to the general market that must be covered (the market not covered by Apple). For instance, this may mean focusing on environment-friendly devices rather than devices that promises superiority or advanced technology: green electronic devices. Of course, it is possible to combine route 2 and 1 as well as route 2 and 3. References Abel, I., 2008. The Apple Ipod: Succeeding where others failed. Emerald Group Publishing Limited. Retrieved 12 January 2013 from http://www.emeraldinsight.com/learning/management_thinking/articles/pdf/ipod.pdf Hunger, J. and Wheelen, T., 2011. Essentials of strategic management. 5th ed. Boston: Prentice Hall. Marino, L., n.d., Competition in the MP3 player industry in 2005. _______: _________. Porter, M., 1985. Competitive advantage: Creating and sustaining superior performance. New York: The Free Press. Salvatore, D., 2010. International economics. 10th ed. International Edition. Prentice Hall. Shor, M., 2006a. Dominant strategy. Retrieved 12 January 2013 from http://www.gametheory.net/dictionary/DominantStrategy.html Shor, M., 2006b. Nash equilibrium. Retrieved 12 January 2013 from http://www.gametheory.net/Dictionary/NashEquilibrium.html Varian, H., 2010. Intermediate microeconomics: A modern approach. 8th ed. New York: W.W. Norton & Company. Read More