Lessons for companies in the Middle East
The ongoing battle between the two rival companies is worth exploring by companies in the Middle East and worldwide as it unveils complex issues that go beyond ‘innovation’ as the main driver of growth and profitability in the business world.
Apple is still losing market share to its Korean rival, Samsung, in the smartphone market, as indicated in a report by Juniper Research (published in Forbes magazine). It seems that the company, that first earned its global reputation as ‘innovator’ under the late Steve Jobs, faces the challenge of maintaining its innovative zeal and edge in the face of its competing partner. Indeed, Apple has to prove to its smartphone hardcore loyalists and fans that it maintains its global leader status, changing the way people live by the creative use of technology, and that their new phones represent a radical departure from older versions and are aligned with the market’s needs.
Samsung’s smart features were based on technology that propounded new ways of using smartphones, targeting mass markets with ‘lower cost’ appeal. This is a strategy that has beaten Apple in its global markets – even on their home turf in the United States – and has given Samsung a strong foothold in emerging markets, nearly doubling sales figures of Apple’s smartphone.
Surprisingly, these two companies currently engaged in a war for market share, were ideal partners a decade ago when the two did not compete. An online article published by The Wall Street Journal in July 2013 stated that Samsung has been the major supplier of the microprocessor ‘brain’ in Apple’s iPods, iPhones and iPads and high-resolution screens. In fact some of its new iPads still use Samsung screens, according to industry analysts.
When Apple engaged in a partnership with Samsung it aimed to focus on its core competencies – built on trendy, stylish designs with innovative features – while outsourcing chip design and manufacturing to its partner, Samsung. Samsung was the main player in this market in a mature technology sector, leaving Apple with few options, being one of few companies that could deliver the required mass quantities of the latest technologies to Apple.
The partnership entailed information sharing and dependence on Samsung that reduced Apple’s bargaining power and ability to use different technologies, according to certain Apple executives who expressed these concerns in the past. At the same time, Apple executives were cautious about Samsung’s ambitions to compete with their company, and tried to limit information sharing with Samsung executives, especially business forecasts.
Consequently, Apple has cut back on some of its purchases from Samsung by reducing iPod screen purchases and flash-memory chips for data storage. As to the Apple processor, Samsung is still the sole supplier, with $5 billion in purchases in 2012, according to Mark Newman, an analyst at Sanford Bernstein in Hong Kong, who was quoted in The Wall Street Journal online. This also shows that Samsung has much at stake if it loses Apple as a client, as it will have a negative impact on its earnings. Nevertheless, Apple was able to shift more of its flash-memory chips to Toshiba Corp., and to end its reliance on Samsung’s high-resolution screens. Thus, in 2010 Sharp Corp. screens were used in iPhone 4. The reason for this move was Apple’s efforts to differentiate its gadgets through screen quality, often perceived by the customer as a distinct ‘face’. A DisplaySearch analyst, Hiroshi Hayase, says that a screen is a phone’s ‘face’, buying screens from your competitor means that you will be sharing key information. However, other efforts to break free from Samsung failed in 2011 when Apple asked Sharp to supply screens for its third-generation iPad.
Furthermore, Apple’s efforts to break free from Samsung’s grip on chips haven’t yielded the desired results in its negotiations with Taiwan Semiconductor Manufacturing Company (TSMC) on supplies. This time, Apple executives had learned their lesson and avoided entering into a partnership that would lead to dependence upon such a powerful supplier. The Wall Street Journal points out that Apple asked either to invest in TSMC or that TSMC create dedicated factory space for Apple chips. Both proposals were rejected by TSMC Chairman, Morris Chang, as the company saw this type of deal as a threat to its independence and manufacturing flexibility.
Samsung’s strategy was to keep its major client Apple entangled in their ‘marriage’ with competing phones, whilst at the same time managing to strike a deal with Sharp, buying a 3% stake and to buying more LCD panels, making them their fifth-largest shareholder and its key client.
This dichotomous buyer-supplier relationship between two giants raises questions as to the strength of relationship that should be forged with big suppliers in an era when marketing orientation is directed towards creating long-term value-delivery networks, characterized by long-term relationships with suppliers and distributors. This orientation builds on the premise that competition takes place nowadays between value-delivery networks rather than between companies. This would lock key suppliers and distributors into a long-term partnership entailing mutual trust, sharing of information and resources to the benefit of both, giving all partners a competitive edge in the global marketplace.
In fact, this partnership was ideal for both companies when the two did not compete, as it contributed to giving Apple an innovative advantage in the global marketplace. But, the Samsung-Apple partnership warns against the pitfalls of turning a blind eye to the potential threat of a supplier partner in one area turning into a fierce competitor in the marketplace.
Clearly, striking a balance between achieving synergy with profitability whilst maintaining independence and flexibility is not an easy task. If the partnership turns sour, ‘divorce’ will be a long and thorny process …
Instead of resource-based competition (that is built on cheap labour or natural resources), Middle Eastern companies that become increasingly integrated into global supply chains could benefit as suppliers from the transfer of know-how, technological and managerial skills to produce high value-added products. In fact, building close partnerships that are characterised by trust and exchange of knowledge, information and experience with positive returns for partnering firms along the supply chain is a lengthy cumulative process. The time, resources and efforts invested into this relationship give rise to the issue of avoiding expansion into the partner’s markets, and instead exploiting new technologies and know-how that are acquired in complementary markets that partners would find attractive to enter.
Indeed, the entangled relationship between Apple and Samsung is a case in point, with both partners having so much to lose that they could not afford to compete on other fronts.