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CONFIDENTIAL
Mobile Handset petitor Analysis: Ericsson
SAMSUNG ELECTRONICS CHINA (SEC China)
August 20, 2001
This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from McKinsey & pany. This material was used by McKinsey & pany during an oral presentation; it is not a plete record of the discussion.

OVERVIEW OF PETITOR ANALYSIS FRAMEWORK

1. Background information

? Location

? Starting year

? Registered ? Number of

capital

employees

? Management ? Era analysis

team

? Equity

structure

4. Value chain strategy
Focus on Marketing, advertising and promotion Distribution (channel and sales force)

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2. Strategy
? Mission ? Vision ? Corporate strategy ? Market position

5. Organization and ownership
? Organization structure ? Ownership structure

3. Product/market
? Key product offerings ? Key customers ? Value proposition ? Geographic focus ? Pricing

6. Financial performance
? Sales ? Profit

1

KEY ISSUES TO PROBE - ERICSSON

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Strategy
Product/market
Value chain strategy
Organization & ownership

? What will be Ericsson’s strategic focus for the ne t 5 years? ? How will Ericsson secure its leading position in mobile
infrastructure?
? What products will Ericsson be focusing on? ? Which market segment will Ericsson be interested in? ? Will Ericsson be e a niche market player in mobile handset?
? How does Ericsson secure its leadership in technology? ? How does Ericsson improve its local production capability? ? How are Ericsson’s mobile handsets distributed?
? How does Ericsson organize its JVs and WOFEs? ? What functions does Ericsson China centralize?

Financial performance

? How good is Ericsson’s recent financial performance? ? How will Ericsson improve its performance in the future?

2

BACKGROUND INFORMATION

1. Background information

? Location

? Starting year

? Registered ? Number of

capital

employees

? Management ? Era analysis

team

? Equity

structure

4. Value chain strategy
? Focus on ? Marketing,
advertising and promotion
? Distribution (channel
and sales force)

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2. Strategy
? Mission ? Vision ? Corporate strategy ? Market position

5. Organization and ownership
? Organization structure ? Ownership structure

3. Product/market
? Key product offerings ? Key customers ? Value proposition ? Geographic focus ? Pricing

6. Financial performance
? Sales ? Profit

3

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ERICSSON IS A TECHNOLOGY LEADER IN MOBILE MUNICATION AND A MARKET LEADER IN MOBILE INFRASTRUCTURE

Background

Location

? Based at Sweden, with 24 offices in China ? Since 98, China has been Ericsson's largest
market in the world

Investment

? Invested more than USD 0.6 billion in China

Business Starting Employees History

? Four main business units: Mobile infrastructure, mobile handset, data network and
circuit switching/packet switching multi-service networks
? First office in China in 85, first JV in China in 92
? 100,000 staff in 140 countries ? Over 4,000 employees in China ? 24 offices, 10 JVs and 4 WOFEs
? 85: First Ericsson office in Beijing ? 87: First mobile network launched Qinhuang island ? 89: Set up offices in Guangzhou and Shanghai ? 92: Started JVs in China for mobile infrastructure and handset ? 94: Established Ericsson China Limited ? 95: China became Ericsson's third largest market in the world ? 96: China became Ericsson's s second largest market in the world ? 97: Established R&D center in Shanghai and Ericsson China institute ? 98: China became Ericsson's largest market in the world, established Chongqing
Ericsson technology
? 99: Established Ericsson consulting in Shanghai and mobile multi-media lab in
Zhonguancun
? 2000: First to plete WCDMA test in China

Implication
? Leader in mobile system
technology including GSM, GPRS and 3G
? Emphasize on mobile
infrastructure and claim to be the only total solution provider for a full range of 2G and 3G standards
4

STRATEGY

1. Background information

? Location

? Starting year

? Registered ? Number of

capital

employees

? Management ? Era analysis

team

? Equity

structure

4. Value chain strategy
? Focus on ? Marketing,
advertising and promotion
? Distribution (channel
and sales force)

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2. Strategy
? Mission ? Vision ? Corporate strategy ? Market position

5. Organization and ownership
? Organization structure ? Ownership structure

3. Product /market
? Key product offerings ? Key customers ? Value proposition ? Geographic focus ? Pricing

6. Financial performance
? Sales ? Profit

5

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ERICSSON AIMS TO SECURE ITS LEADERSHIP POSITION IN NETWORK EQUIPMENT AND MAY BE E A NICHE PLAYER IN MOBILE HANDSET

Product

Strategy
? Maintain foothold in the low end mobile
handset market through JV with Nanjing Panda
? Develop 3G technology (WCDMA) for
mobile munication by collaborating with MII and Do o, and apply leading technology to products
? Secure its leadership position in network
equipment rather than be ing the bestselling brand for mobile handsets

Value delivery system

? R&D localization through collaboration
with Chinese government and
universities
? Further e pand local production capacity ? Centralize marketing functions under
Ericsson China
? Distribute though 5 first-tier resellers
including PTAC and PTIC
? Builds consumer website for Ericsson
handset users

Source: Ericsson press release, Dresdner Kleinwort, McKinsey analysis

Vision To innovate in mobile network and internet convergence and to lead in the era of mobile internet
6

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ERICSSON’s MARKET SHARE IS DECREASING OVER THE PAST FEW YEARS
Monthly market share development (Percent of market in units sold)
40

Nokia

30

Motorola

20

10

0

98

99

SSoouurrccee:: RIDeCta,ilMAcuKdiintsey Analysis

Jan ‘00

Siemens Ericsson
Dec ‘00
7

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ERICSSON IS NOW NUMBER FOUR IN SALES VOLUME AND NUMBER FIVE IN REVENUE IN THE MOBILE HANDSET MARKET

Breakdown of sales by brand each year Percent

Breakdown of units sold by brand each year Percent

Others

18

17

14

Others

15

17

14

Samsung 5

9

9

Samsung

3 8

8

7

Siemens

7

8

10 Siemens

8

10

12

Ericsson

8

7

7

Ericsson

8

9

Nokia

29

27

26 Nokia

32

28

28

Motorola

33

99

32 2000

34

Motorola

34

2001

99

29 2000

30 2001

Source: GfK, IDC, McKinsey analysis

8

PRODUCT/MARKET

1. Background information

? Location

? Starting year

? Registered ? Number of

capital

employees

? Management ? Era analysis

team

? Equity

structure

4. Value chain strategy
? Focus on ? Marketing,
advertising and promotion
? Distribution (channel
and sales force)

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2. Strategy
? Mission ? Vision ? Corporate strategy ? Market position

5. Organization and ownership
? Organization structure ? Ownership structure

3. Product /market
? Key product offerings ? Key customers ? Value proposition ? Geographic focus ? Pricing

6. Financial performance
? Sales ? Profit

9

KEY MESSAGES - PRODUCT/MARKET

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? Ericsson claims to be the only total solution provider in mobile
munication who offers a full range of 2G and 3G standards. To secure its leadership position in mobile infrastructure, Ericsson may be e a niche market player in mobile handsets
? Ericsson is a technology leader in mobile munication, which is
reflected in its early releases of WAP, GPRS and bluetooth handsets and 3G networks
? Ericsson gives up the high-end market in mobile handset to focus
on low-end. It is relatively strong in 1st tier cities, and the North and East China

10

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ERICSSON OFFERS TOTAL SOLUTIONS IN MOBILE MUNICATION WITH MORE EMPHASIS ON MOBILE INFRASTRUCTURE

Ericsson product offerings

Ericsson mobile handset

Products
? First WAP handset in
the world (MC 2 )
? R320sc WAP handset
with Chinese interface
? A2638sc for young
and successful
? T29sc for mobile
professional
? R380sc for business
elite
? T20sc, A26 sc for
young and fashionable

Now and future
? First GPRS handset and first
bluetooth handset (T36)

Ericsson network
Source: Ericsson press release

? GSM and UMTS mobile
infrastructure including GSM, DCS 00, CDMA and WCDMA
? Data network, e.g. A
D301 ATM switch A I540 IP router, and IP phone

? First to provide GSM 00/
00 networks simultaneously
? Leader in WAP ? Leader in GPRS ? Total solutions in 3G based on
WCDMA, CDMA 2000 and EDGE
11

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ERICSSON MAINTAINS FOOTHOLD IN THE LOW END MARKET

Breakdown of unit sold by brand for each price point Percent

Others

10

5

Samsung

15

17

18

Siemens

16

00

3

0

Ericsson

02

50

13

14

Nokia

16

29

12

10

32

34

Motorola

56

51

43

00 7 0

23

24

High (> RMB 3,500)

High-mid (RMB 2,5003,500)

Mid (RMB2,0002,500)

Mid-Low

Low

(RMB1,500- (<RMB1,500)

2,000)

Units as % 9% of total

15%

Source: Sino-MR (Jan 2001 – Feb 2001), CCID

7%

26%

43%
12

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ERICSSON MATCHES SIEMENS IN THE 1st TIER CITY MARKET
Percent market share, 2000

100%=

6.7

7.0

8.5

14.8 Million units

Others

21

25

24

30

Ericsson

10

7

Siemens

10

9

7

9

7

11

Motorola

28

29

30

28

Nokia

31

Tier 1

Tier size as % of total

%

30
Tier 2 %

30
Tier 3 23%

24
Tier 4 40%

Source: McKinsey Analysis

13

ERICSSON IS RELATIVELY STRONG IN NORTH AND EAST

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Market share by brands per geographic area, 2001 Percent

Others Samsung Ericsson
Siemens

13

15

12

15

13

14

5 9

5 8

7

11

13

10

4

6

8 7

14

16

13

13

11

17

Nokia

30

25

29

26

29

26

Motorola

29

31

29

31

28

28

East

West

North

Northeast

South Central

Market share

30

13

15

13

by geographic

area

Percent

Source: GfK, McKinsey Analysis

11
14

VALUE CHAIN STRATEGY

1. Background information

? Location

? Starting year

? Registered ? Number of

capital

employees

? Management ? Era analysis

team

? Equity

structure

4. Value chain strategy
? Focus on ? Marketing,
advertising and promotion
? Distribution (channel
and sales force)

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2. Strategy
? Mission ? Vision ? Corporate strategy ? Market position

5. Organization and ownership
? Organization structure ? Ownership structure

3. Product/market
? Key product offerings ? Key customers ? Value proposition ? Geographic focus ? Pricing

6. Financial performance
? Sales ? Profit

15

KEY MESSAGES - VALUE CHAIN STRATEGY

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? For core products such as mobile or fi ed line infrastructure, Ericsson
has centralized the sales forces to provide “one face” to customers; for smaller products such as mobile handsets, Ericsson sells through JVs and distributors
? Ericsson uses PTAC, PTIC, Stellar, 508, and the United First as its 5
first-tier resellers. Insufficient support provided by resellers limit the ability of its dealer and channels to provide pre- and after-sales support to customers, which greatly afftect Ericsson’s position in the China market

16

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ERICSSON PRESENTS "ONE FACE" TO CUSTOMERS BY CENTRALIZING CORE PRODUCT SALES THROUGH ITS OWN SALES FORCE

R&D

Manufacturing Marketing

Sales

Service

Network
? Mobile
infrastructure
? Wired-
line

Shanghai R&D centre

Nanjing Ericsson Beijing Ericsson
Beijing Ericsson Tele System

Ericsson China
Chongqing Ericsson Technology

Ericsson China Dalian Ericsson Heilongjiang Guangdong

Terminal
? Mobile
handset

Beijing Ericsson Mobile Tele Nanjiing Ericsson Mobile Terminal

? Electronic po-

? nents

Shanghai Ericsson

Ericsson China

Distributors/dealers Distributors/dealers

Rationale
Ericsson's route to market is based on product characteristics Core products are sold through the Ericsson sales force Smaller products are sold through JVs and distributors

Source: Ericsson press release, interviews, McKinsey analysis

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ERICSSON IS STRONG AT TECHNOLOGY AND MARKETING, BUT

RELATIVELY WEAK AT MANUFACTURING AND SERVICE IN MOBILE

HANDSET

R&D

Manufacturing and supply chain

Marketing and branding

Sales and distribution

Service

Strengths

? Technology
leader in GSM,GPRS and 3G
? First to
release WAP, GPRS, bluetooth handsets

? E panded
local manufacturing with 2JVs devoted to mobile handsets
? Centralized
purchasing and supply

? Centralized
marketing functions to promote strong and consistent brand image

? Good
relationship with resellers such as PTAC and PTIC

Levels for improvement

? Lack of big-
hitting new models
? Product
development not meeting market demand in China

? Manufacturing
with un petitive cost structure
? Local production
capacity insufficient pared with Motorola, Nokia and Siemens

Source: Ericsson press release, IDC, McKinsey analysis

? Insufficient
support provided by the resellers limit the ability of its dealers and channels to provide preand after-sales support

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ERICSSON DISTRIBUTES THROUGH FIVE FIRST-TIER RESELLERS

Ericsson Channel Structure
Vendor
PTAC, PTIC, etc.
Local tele operators
Retailers/retail chain stores
Consumers
? Being a major mobile network equipment
vendor, Ericsson maintains good relationship with government bodies and distributes through PTAC, PTIC and local tele operators
Source: IDC

Rationales
Ericsson uses PTAC, PTIC, Stellar, 508, and the United First as its 5 first-tier resellers. Since there is a huge price gap between official and parallel imports, the unit sales of Ericsson handset in China through official channels was affected resulting in downward pressure on handset prices. Insufficient support provided by resellers limit the ability of its dealer and channels to provide preand after-sales support to customers, which greatly afftect Ericsson’s position

ORGANIZATION AND OWNERSHIP

1. Background information

? Location

? Starting year

? Registered ? Number of

capital

employees

? Management ? Era analysis

team

? Equity

structure

4. Value chain strategy
? Focus on ? Marketing,
advertising and promotion
? Distribution (channel
and sales force)

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2. Strategy
? Mission ? Vision ? Corporate strategy ? Market position

5. Organization and ownership
? Organization structure ? Ownership structure

3. Product /market
? Key product offerings ? Key customers ? Value proposition ? Geographic focus ? Pricing

6. Financial performance
? Sales ? Profit

20

KEY MESSAGES - ORGANIZATION AND OWNERSHIP

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? Ericsson has 10 JVs and 4 WOFEs in China, among which Beijing
Ericsson Mobile and Nanjing Ericsson Mobile Terminal are devoted to mobile handsets. Ericsson believes that localization is key.
? Ericsson uses joint venture partners to enter the market, and
established holding pany in 94 to better manage local operations
? Ericsson uses its own sales force to sell core products and delivers
coordination to pete in “solution” sales

21

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ERICSSON CHINA HAS CENTRALIZED MANY MON FUNCTIONS FROM JVs
Ericsson China Ltd.

Nanjing Ericsson

Nanjing Ericsson mobile terminal

Beijing Ericsson mobile

Guangdong Ericsson

Chongqing Ericsson technology

Marketing and branding

Purchasing and supply

Manufacturing

Sales

Manufacturing

Sales

Service

Marketing

Sales

Service

R&D

Manufacturing

Sales

Service

? Mobile

? Mobile

? Mobile

? Mobile

? Mobile

infrastructure

handset

handset

infrastructure

infrastructure

? Mobile base

Source: Ericsson press release

station

22

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ERICSSON HAS 10 JVs AND 4 WOFEs IN CHINA, AMONG WHICH 2 JVs ARE DEVOTED TO MOBILE HANDSETS

Ericsson China Ltd. (Holding Co.) 94

55% with Beijing Cable Tele

49% with PTIC, Beijing Tele -ponents, Beijing Tele Equipment, Yun Shing
80% with Shanghai Simtek

65% with Nanjing Panda

56% with GD PTA Guangdong Machinery Import and E port

55% with Nanjing Radio Factory, HK Yun Shing

47.5% with WRI

Long ing Investment Changqing Southwest Wireless tele

100%

100% 100%

Beijing Ericsson

Beijing Ericsson Mobile

Shanghai Ericsson

Helongjiang Ericsson

Nanjing Ericsson Mobile Terminal

Guangdong Ericsson

Nanjing Ericsson

Wuhan Yangtze Ericsson

Chongqing Ericsson Tele

Chongqing Ericsson Tech.

Ericsson R&D center Shanghai

Ericsson Consulting Shanghai

Dalian Ericsson

Esta-

94

95

97

blished

year

95

92

97

98

98

97

99

Product ? PB
offering MD 110

? Mobile ? Elec- ? Tele- ? Mobile

handset tronic po-
? Mobile nents equip-

handset

base

ment

station

service

? Mobile ? GSM

infra-

900/

structure 00

services A E 10

? SDH ? Digital
trans- micromission wave systems

? Mobile ? Soft- ? Consul- ? Tech-

system ware

ting

nical

market- applica- service service

ing sales tion

for wire-

and

less and

service

fi ed line

opera-

tors

Source: Ericsson press releases; literature search; interviews 23

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ERICSSON USES JV PARTNERS TO ENTER THE MARKET AND ITS OWN SALES FORCE TO SELL CORE PRODUCTS

Partnership structure & role
Ericsson China (10 joint ventures and 4 WFOEs) Holding pany aims to coordinate all activities in China WFOE for software R&D in China Limited technology transfer to China – heavily import dependent Service joint ventures are cost centers

Route to market
Ericsson’s sales force (based in the holding pany) sells core products (switching and transmission) Joint venture sales force sells small and standalone products Wireless products sold through distributors

Key messages Uses joint venture partners to enter the market, then established holding pany in 94 to better manage local operations Use its better-trained own sales force to sell core products; delivers coordination to pete in “solution” sales Believes that localization is key; established specially monitored career track for promising Chinese managers to enhance retention

Influence
? Ericsson corporate focused on top to top relations ? Joint venture partners help to gain local customer access

24

FINANCIAL PERFORMANCE

1. Background information

? Location

? Starting year

? Registered ? Number of

capital

employees

? Management ? Era analysis

team

? Equity

structure

4. Value chain strategy
? Focus on ? Marketing,
advertising and promotion
? Distribution (channel
and sales force)

SAMSUNG010605BJ-kickoff2

2. Strategy
? Mission ? Vision ? Corporate strategy ? Market position

5. Organization and ownership
? Organization structure ? Ownership structure

3. Product/market
? Key product offerings ? Key customers ? Value proposition ? Geographic focus ? Pricing

6. Financial performance
? Sales ? Profit

25

KEY MESSAGES - FINANCIAL PERFORMANCE

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? Although Ericsson’s consumer products, i.e. mobile handsets grew
in revenue by 28% in 2000, the profit was negative at SEK –16 billion. The operating profit margin for mobile handset is –29% globally in 2000
? Ericsson’s network products grew in revenue by 29% in 2000, and
in profit by 65%. The operating profit margin for network product is % globally in 2000
? To maintain its leadership position in network products, Ericsson
may be e a niche market player in mobile handsets

26

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ERICSSON SAW NEGATIVE PROFIT FOR ITS MOBILE HANDSETS IN 2000

SEK billions

Revenues globally

Operating profit globally

CAGR=

274

27%

16

14

215

Others

11

55

Enterprise

15

solutions

Consumer*

43

products

189

Network

operators

146

service

providers

99

2000

* Consumer products are mainly mobile handsets Source: Ericsson press releases

CAGR= - 5%

Others
Enterprise solutions

20 00

Network

20

operators

service

providers

0

Consumer* products

99

2 0 33
-16 2000
27


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