Study of Vertical Integration for

Apple and Samsung in Smartphone

Industry
Submitted To:
Prof. M. Akbar

Submitted By:
(Group 3, Section-B)
WMP09059 Abhay Vig
WMP09064 Alok Mishra
WMP09070 Arun Kr Sharma
WMP09079 Gaurav Bhati
WMP09097 Prateek Raizada
WMP09109 Shweta Rastogi
Agenda
Vertical Integration
Smartphone-Industry Analysis
Samsung
Apple
Competitive Advantage Apple Vs Samsung
Historical Financial Analysis
Scenario Based Financial Projection
Vertical Integration
Firms choose to vertically integrate to achieve
transaction cost economies
To minimize several risks involved in transacting with many
parties. These risks include
Difficulties in enforcing contracts with many different parties
Challenges of ensuring the quality of raw materials, component
parts and/or service reach the required level of standards
Risks of asymmetric information and opportunistic behavior
aimed against the firm.

Scale and scope economies

Vertical Integration
Forward
Aiming towards finished products or towards End in
supply chain
Backward
Towards Raw Material i.e. at the Start in supply chain
Smartphone
Brand - design, manufacturing and
distribution
Hardware including features such as
Camera, RAM, ROM, Design etc.
Target Group affecting pricing and
advertising
Software design, manufacturing and
distribution
Supporting applications
Add on Options printers, card readers
Smart Phone Industry Analysis
Threat of New Entrants (Low)
High capital requirement for
operations.
High R&D Cost to stay competitive
Strict Patents
Need to establish a competitive
brand

Bargaining Power of
Bargaining Power of Buyers
Suppliers (Low) for Apple &
Internal Rivalry (High) (High)
Samsung Concentrated Industry 03 largest Buyers benefit from high industry
Samsung is its own supplier for players make up 44% market competition
most components & raw materials share. Access to market information
Apple is also moving towards chip
designing to reduce power of
suppliers

Threat of Substitute Products

(High)
Any smartphone that performs the same
functions is considered to be a substitute
Functionality of iOS, Android or
Windows phone is almost same.
Outside of Industry threat of substitutes
is low. E.g. Tablets, Laptops
Industry Dominance
Smartphones: Leading Companies by % Volume
Share 2010-2013
4-
Global Brand Owner
year 201 201 201 201
(GBO)
trend 0 1 2 3
Samsung Corp 12 19 28 31
Apple Inc 17 17 17 15
Lenovo Group Ltd 0 2 3 4
Nokia Corp 25 12 6 4
LG Corp 4 4 4
Sony Corp 3 3 4
Huawei Technologies
1 2 3 4
Co Ltd
Yulong Computer
Communication
1 1 2 3
Technology
(Shenzhen) Co Ltd
Samsung
 Samsung Electronics
Flagship company of Samsung Group

Contributes 70% revenues of Group

195 Subsidiaries world-wide Consumer

Electronics
63 companies for making components for its

subsidiaries
In-Home Portable
Consumer Consumer
Manufacturing of Home appliances Electronics Electronics
(TV, RF., W. Machines, Mobile Phones)

Biggest Manufacturer of Memory Chips and Wearable

Digital TVs Smartphones
Electronics
Semiconductors

3 Major Divisions

Mobile Division

Consumer Electronics Division

Semiconductors Division
Samsung Mobile Division Evolution

Galaxy S Launched
2012- Worlds largest
cellphone maker
Future
2010 Tizen?
Ultimatum
Produce mobile
1998
phones Android
Era
comparable to Go Global
Motorola 1993-96
New
Management Focus on
Component
1983-93 Manufacturing
A Humble
Beginning
Mobile Division Started
1988 First Mobile
launched
- Low quality
perception
Samsung Mobile Phone Supply Chain

(Source: In the Belly of the Beast: Samsung Electronics Supply Chain and Workforce in South
Korea, Jiwon Han, Wol-san Liem, and Yoomi Lee)
Components in Flagship Smart Phone S6
Samsung Galaxy S6 Components
Function Manufacturer
Accelerometer / Gyro Invensense
Application Processor Samsung
Audio CODEC Cirrus Logic
Baseband Processor Samsung

Envelope Power Tracker Samsung

Heart Rate Sensor Maxim

Image Processor Samsung
NFC Controller Samsung
Power Management1 Samsung
Power Management2 Samsung
PowerManagement3 Samsung
Pressure Sensor STMicro
RAM Samsung
RF Transceiver Samsung
ROM Samsung

Touchscreen Controller STMicro

WiFi / Bluetooth Samsung

Wireless Charging Texas Instruments
Vertical Integration A Strength of Samsung

Invests heavily in its own factories

Manufactures key components

Largest memory manufacturer and LCD display manufacturer

Can make all the major components of a phone cheaper and then

bundle and sell those components to a phone vendor

Competitive Advantage
In-house DRAM

NAND Flash

Displays including LCD, AMOLED

Major Share in company manufacturing OLED display for Mobile

handset

Cost Efficiency

Assured supply for critical components

Technological Innovation

Differentiation
Samsung- As a Component Supplier
Samsung's largest clients (Q1 2010)
Rank/company Part description % of total sales
1 Sony DRAM, NAND flash, LCD panels, etc 3.7
2 Apple Inc. AP (mobile processor), DRAM, NAND flash, etc 2.6
3 Dell DRAM, flat-panels, lithium-ion batteries, etc 2.5
4 Hewlett-
DRAM, flat-panels, lithium-ion batteries, etc 2.2
Packard
5 Verizon
Communication Handsets, etc 1.3
s
6 AT&T Inc. Handsets, etc 1.3

Major supplier to its Rivals such as Apple

Supplies LCD Panels to other TV manufacturers
Primary phone component manufacturer of Apple
3% of Samsungs total sales go to Apple
Performance
Advantages of VI to Samsung
Newer Technology at Faster Rate
Owns and controls research, component supplies, manufacturing
Devices equipped with faster RAM, extra storage, AMOLED screens
Latest Technology at low prices
Gets its components cheaper rates
Results into cheaper manufacturing rates and helps Samsung in selling
their devices at lower prices than competitors
A priori Component Supplies
Most of the cost of Smart Phone manufacturing goes back in to their
component manufacturing division
Increasing their overall revenue
In turn goes back in to research funding
Prioritize supplies to Samsung by holding off others.
Concern - Huge Dependence on Android
Huge Reliance on Google for Android OS
As of August 2015, Samsung have a 37.8% share of the Android
market, which is quite huge.
Vertically Integrate to OS - Tizen
Continued efforts to develop its own OS to reduce its reliance on
Android OS
Over the years it has been involved in the development of Bada,
SLP, and Tizen Platforms.
Apple
Apple
Companys main product lines: computers and portable consumer

electronics, software, cloud services and retailing.

Success can be attributed to software and service products such as

iTunes that complement Apple Incs hardware line, creating an

industry-leading content consumption platform for mobile devices.

Premium pricing of its products

Unaffordable for mainstream consumers in many emerging markets.

Apple
Hardware
Though not produced within, its product are Slim,
ergonomic, user-friendly and they tend to have a price
premium over other competing products.
emphasize simplicity in the operation and minimalist
design, along with other key performance features as
battery life, graphics etc.
Software
iOS mobile operating system various media consumption
and third party applications.
Its primary content offerings are the core of its delivery
platform.
Wide selection of software - In 2013, there were six million
developers in Apples developers community,
Apple
Integrated ecosystem of its products and services

unmatched line-up of the media consumption devices and

associated services

Advantage

It locks consumers within the ecosystem, making switching

between platforms somewhat difficult. This along with the small

number of alternatives has made its users loyal.

Vertical Integration Trends Among Industry Leaders

Apple Inc. boasts one of the most versatile vertical

integration strategies in the smartphone industry.
Apple Inc., is vertically integrated because it is essentially four
companies in one, thereby controlling all the major critical
parts of the chain used to make and sell products.
(a) It is a hardware company (it designs its own hardware),
(b) a software company (it owns, develops and optimizes its
software),
(c) a services company (it equips its products with services such as
the iTunes and iCloud) and
(d) a retail company (it provides consumers with a unique retail
experience)
Apple vertically integrated specialized
Apple Inc.
Apple outsources the manufacturing of all the
products, and purchases other key components
from third parties. It has to rely on external
suppliers for manufacturing and assembling.
VI explained through
Operating System (Proprietary iOS),
numerous application supporting the Operating
system (iTunes & iCloud),
Apple Online Retail Store for most of the products
Premium pricing of its products
Not able to penetrate mass segment
iOS Market Share
Apple Competitive Advantage
Integrated Hardware Software Approach
Software
Content
Services provided
Applications product specific
Drivers of Apples VI
Scale and Scope Economies Since the outside suppliers are supplying
majority of their producers to Apple Inc. only hence their ability to take
advantage of economies of scale and scope by aggregating the demand is
very less. Hence Apple gains maximum from Vertical Integration.

Asset Specificity - As Apple Inc. is using same software and distribution

system and also same suppliers for its hardware hence its Asset specificity
is very high. Therefore Apple Inc. will benefit maximum from Vertical
Integration.
The Asset Specificity of Apple Inc. has reached to that level where
transaction costs of market exchanges are so large that Vertical Integration
is more agency efficient than market exchanges.

Product market scale and growth As Apple Inc. control a large chunk
of the computer and mobile market hence it will have maximum advantage
from Vertical Integration.
Financial Analysis
Financials

Historical Financial Analysis

Scenario Based Projections

(Excel File)

Financial Analysis
Thank You