A similar force towards conformity can be found among companies strategies. Academics use the fancy word isomorphism to describe the situation. Isomorphism can be created by CEOs having similar background, CEOs copying seemingly successful companies, CEOs' compensation contract, government regulation, and a number of other factors. This note will illustrate the disastrous effect of isomorphism on HTC, a company producing mobile phones.
I am basing this note on publicly available information so I cannot tell the whole story, but I think what happened to HTC should serve as a warning. If you are familiar with the company and notice any mistakes I would appreciate feedback.
2004-2006: Old unique strategy
In the early 2000s, HTC had a unique strategy. Having been involved in contract design and manufacturing of PDAs (personal digital assistants) in the late 1990s, the company realised early that phones and computers were merging. The key new product was smartphones using the Microsoft Phone operating system. Since HTC was not known among end-consumers, it used the same approach as for PDAs, i.e. selling the smartphones under the telecom operators' own brands, e.g. O2 in the UK, Orange in France.
No other mobile phone manufacturer offered operator-branded high-end mobile phones to the telecom operators. It is likely that the telecom operators bought smartphones from HTC for two reasons. First, they wanted to strengthen their own brands. According to market research from Satmetrix (here), mobile network operators still have one of the lowest scores on customer loyalty. Second, they wanted to put pressure on the large manufacturers of mobile phones. They were signalling that they could backward integrate into mobile phones, if price concessions would not be forthcoming from Nokia, Motorola, Sony-Ericsson and others.
The stock market rewarded this strategy by pushing the shares from TWD 40 (2004) to TWD 400 (2006).
2007-2009: New copy-cat strategy
During 2006, HTC decided to phase out contract design and manufacturing and instead focus on branding HTC to the end-consumer. The focus was going to be on the high-end prosumer market segment. The annual report described how "these powerful and functional phones are ideal for people who are mobile and often perform their work outside of the traditional workplace" In the subsequent two years HTC increased its product range so that it covered everything from the youth market to the high-end prosumer market. In 2008, Microsoft Phone phones were supplemented by Android phones. In the final quarter of 2007, around 90% of the revenue came from HTC branded phones. In other words, the transition from one strategy to another happened very quickly.
HTC's strategy was now largely indistinguishable from that of Nokia, Sony-Ericsson, Motorola, LG, and Samsung. All these companies were selling everything from mass market phones to high-end smart phones to the same customers; the telecom operators of all countries. Suddenly, HTC's two unique selling points were no longer useful. Instead, product innovation and advertising were key ingredients to success. In addition to this set of companies, Apple and RIM/Blackberry had created unique strategies focusing on the high-end.
Reading the annual reports from these years makes it very clear that HTC was not willing to make any difficult trade-offs regarding their strategy. They want to have products for all segments: young and old; low-end and high-end; Windows, Android and Brew operating systems; smartphones and tablets; US, Europe, China, South America, and Russia. However, the confusion in the annual reports is not totally reflected in reality; all through these years, the average selling price of HTC phones is quite high.
HTC's profitability declined during the time period due to increased R&D and marketing intensity. The stock market was not very impressed by the new strategy and the share price fluctuated up and down between TWD 300 and 600.
2010: Stockmarket falls in love with HTC
During 2010, Nokia, the biggest manufacturer of mobile phones, imploded due to a poor range of smartphones. Samsung and HTC filled the gap by offering Android smartphones. HTC was perfectly positioned in the market place and sales almost doubled. Several Harvard Business School case studies were published praising the company's insightful top management team. Furthermore, HTC won the Device Manufacturer of the Year award.
A sign of hubris was the entry into the crowded Chinese market. Twelve companies had market share above 0.5% in 2009. Seven of these companies were Chinese companies. Entering late and without a strong strategy is normally not very beneficial to the bottom line. Another sign of hubris was that HTC started development of their own application store.
The share price exploded in 2010, from TWD 300 (January) to TWD 1,000 (December). In early 2011, the share price was in bubble territory.
2011-2012: Hard fall
HTC kept the same copy-cat strategy. When companies compete along the same dimensions, competition will be quite tough. Both advertising and R&D are discretionary costs and thus subject to economies of scale, putting smaller companies to a disadvantage. Samsung turned out to be the winner among this group of companies and all others turned out to be losers.
In 2011 HTC's worldwide market share peaked at 2.9% (seventh largest). HTC's share price fell from a high of TWD 1,200 to TWD 300.
2013: Anything can happen
HTC muddled through trying to adjust to lower sales, but its strategy had not changed in any major way. HTC still produced high quality, high-end phones. However, its problem was one of strategy not operations.
With a share price of TWD 150 it is difficult to forecast what will happen. The company has already suffered from the change of strategy in 2007. Maybe the company will turn itself around, maybe it will be acquired, or maybe it will continue to bleed. If I were an investment banker, I would have pushed for a merger between Nokia and HTC. By slapping Nokia's superior brand on HTC's superior phones, Samsung would have a much stronger competitor.
Conclusion
HTC started out with a unique strategy that was rewarded by high profitability and rising share price. Then the company was desperate or greedy for even faster growth. Two massive mistakes were made in 2006-2007. First, the hitherto successful strategy was terminated quickly. (If the company wanted to introduce HTC branded phones, why not do so as a supplementary product line? If the telcos were interested in buying high-end private label phones, they would not have any option.)
Second, the new strategy was not unique. Several companies had previously failed by using a similar strategy as HTC (e.g. Ericsson, Siemens, Sony). When multiple manufacturers (from multiple countries in addition) sell similar products to the same customers, they often resort to price competition. When competition is driven by price, only one manufacturer (typically the largest) is able to make good profits (i.e. Nokia and then later Samsung). Here is the competitive landscape in 2006 before entry (source: Euromonitor):
- 35% Nokia
- 13% Samsung
- 12% Motorola
- 8% LG
- 7% Sony-Ericsson
- 1% Sharp
- 0.5-1% Eight other companies
Thanks for Lau See Yang for all the data collection.
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