Structure, Conduct and Performance Model in the Mobile Phone Industry - Assignment Example

Structure, Conduct and Performance Model in the Mobile Phone Industry Structure, conduct and performance In the SCP model structure means the features and organization of the market. The model’s principle idea is that “industry structure determined the behaviour or conduct of firms, whose joint conduct then determined the collective performance of the firms in the marketplace” (Luo, 2014, p.113). In a more collective term it indicates the significance of the relative size of the primary (agriculture), secondary (industry), and tertiary (service) sectors. The second version of structure is the number and size of major companies in the industry. For instance, in UK market study is conducted based on the total output of the 100 biggest firms, while in USA 500 largest firms are considered by the Fortune magazine to publish annual directory. If these large firms become too much influential in the market then they can lead to major political and economic repercussions. Then structure also indicates the significance and features of individual markets in the economy. As such structure means the conditions under which the firms can perform in a specific market. Here the conditions, which can be more than twenty, can refer to the number of buyers and sellers, the manner in which products are discriminated, barriers faced by new firms when they strive to enter the market, and the manner in which firms are assimilated or diversified. By conduct, it means the activities of a firm in the industry, the strategies applied by the firm, and the manner in which the strategies are planned. The emphasis is on the price structure of the firm whether the price is set individually or in association with other firms in the industry. Also, conduct refers to the manner in which firms plan their advertising process, and the expenditure on such advertising. For an economist, the important issue is the impact of the performance of firms on the economic development of the country. This includes the extent to which firms can satisfy the consumers in a given period. This can be understood by their efficiency in production, and whether the resources of production are utilized properly without wastage. Also, it is considered whether the firms are producing according to market demand both in quality and quantity. All these issues can be understood by studying the “relationship between price and costs, and the level of profits earned” (Ferguson, 1994, p.15). In today’s economy where there is perfect competition in markets firms can make maximum profit by setting their price equal to the marginal cost, which results in a “price and output combination that is both productively and allocatively efficient” (Ferguson, 1994, p.15). It can be said that a market has inferior performance when there is such conditions like monopoly or oligopoly. In such cases although production will be efficient, i.e. output will be able to meet the demand of the consumers, the level of output will not be allocatively efficient. This is because in a monopoly market, firms can dictate the price at which they want to sell their products and such price is usually higher than the marginal cost (Ferguson, 1994, p.15). I. SCP in the mobile phone industry Competition in an industry is a broad subject that has been extensively studies based by numerous research and analysis. However, till date competition in the mobile phone industry has not been subjected to major academic research. In this paper I will study the market competition in the mobile phone industry within the structure, conduct and performance framework. At the onset it can be noted that the market conditions of the mobile phone industry in two countries like the United States and Europe is vastly different. In Europe there are parallel sales channels while in the United States mobile operators rule the market with their access to the ultimate customers. Moreover, in the US mobile phones are sold by operators brands either individually or in collaboration at reduced price. In addition, mobile service in the US is dominated by two kinds of technology like GSM and CDMA while in the UK the dominant technology is GSM. If we study Nokia in the US, then we can see Nokia reacts adversely to the general mobile phone market condition of the country. In addition to emphasizing solely on GSM technology, Nokia refuses to sell its handsets based on the terms of the operators and insists on selling under its own brand name. The mobile phone market is made up of various interconnected entities. The rank of importance can vary in different markets like in the US and in Europe, the common element remains that there are a number of actors involved. In general, the manufacturers of mobile handsets work in close collaboration with various network operators. In the stage of the handset manufacture the basic requirements come from component and equipment providers. However, there are handset manufacturers who do not take the responsibility of the entire manufacturing process. For instance, Apple receives displays from LG and processors from Samsung. There are other handset manufacturers like Samsung who produce most of the components without help from others. However, manufacturers can also partly or wholly outsource their production to a contract manufacturer like the Elcoteq or Flextronics. On the other hand, mobile handset manufacturers like the Nokia have to work in coordination with mobile infrastructure manufacturers like Ericsson or Nokia Siemens Networks, and the mobile operators so as to ensure smooth sales other than the sales channels established by dealers like Gigantti (Husso, 2011, p.27). Then there are application and content providers along with other service providers. In order to maintain competition, a firm needs to design an appropriate strategy which can be defined as “how a firm attempts to compete in its environment, encompassing key choices about goals, products, markets, marketing, manufacturing, and so on” (Porter, 1981, p.610). There are four factors based on which strategies are designed – strengths and weaknesses of a firm, economic status of the industry along with technical opportunities and threats, significance of the key participants, and overall demands from the society (Luo, 2014, p.113). Today, in the era of fast communication people now are heavily reliant on mobile devices for communication in a convenient manner. The mobile phone market is fast expanding to meet the growing demand and chances of it getting saturated are extremely low. The UK mobile industry is number one in providing innovative and technologically advanced phones. It has been seen that compared to any other electronic gadgets mobile phone consumers are more easily adaptable to new technologies and integrate them in their daily lives. With the advent of smartphones and high-speed wireless internet through 3G and 4G mobile phone industry is becoming bigger every day. With growing sales of smartphones a major source of revenue for the industry comes from launching of various applications. One major weakness of mobile phone industry is falling prices of technologically advanced phones in quick succession due to constant development of technogically updated mobile phones by competitors. Moreover, since there is stiff competition in the mobile phone industry the firms spend heavily on advertising and other forms of promotions which can put a dent in the profit structure of the industry. However, mobile phone industry is extremely technology oriented and so constant technological innovations and manufacturing of new handsets can maintain a steady buying spree from the consumers. Mobile smartphones are today not just used for communication purpose but they are also used for the various applications that are available. As such technological convergence is steadily increasing with new ideas coming from the computer industry. Moreover, usage of mobile phone by growing proportion of global population is constantly on the rise. With hundreds of smartphones getting introduced in the market every day market often overflow which can be a threat for any particular mobile brand. Moreover, rapid technological innovations can also be a major setback if a particular firm does not focus on updating their handsets to beat the competition. II. Entry of new firms in mobile phone industry and the barriers to entry In order to comprehend the competition that exists in mobile phone industry, it is necessary to understand its cost structure. For the launch of any handset in the market major investments are required in specific ventures, for instance wireless internet connection like 3G network. In mobile phone industry it is prudent to invest on production and innovation processes only if there are justified opportunities to make profits after the investments are made. In this industry capital costs are mostly fixed and hence cannot be compromised, therefore pricing structure should be such that prices are above the incremental costs. So, it can be seen it is the costs that are involved in making mobile phones that determine price policy of the mobile operators. An efficient pricing policy is one that sets different prices for different services. In general, services which has inelastic demand their prices are kept at a very high level while services which have elastic demand have their prices set at marginal level. Such pricing policy happens when unregulated firms make maximum profits. So, the fact that different prices are set for different services symbolizes an efficient market performance and does not indicate a market failure. In any industry, competition in the market is dependent on the cost structure of the existing competing firms. In mobile phone industry cost structure is composed of huge fixed costs and low variable costs. The major portion of the costs is not dependent on the number of callers as they are fixed and therefore sunk which means these are specific investments which are involved in building a brand name in mobile networks. These costs cannot be, to a large extent, recovered if the firm goes out of business. Hence these investments need to be effectively planned or else they should be considered as written off. Indeed, these unrecoverable sunk costs are deciding factors for competition and price structure in the mobile phone industry. Thus, in mobile phone industry a new firm will not enter unless it has the capacity to make huge investments involving high fixed costs and low variable costs. In such case, the firm can survive only if it sets prices at “incremental or average variable cost” (Haucap, 2003, p.2). Also, the prices need to include a surcharge over the incremental costs as such surcharge can cover, to some extent, the high fixed (and unavoidable) costs; only then the firm can expect to make profit in order to survive in the market. The intensity of competition in the mobile phone industry is largely influenced by the number of barriers that exist for new firms to enter the market. Such barriers are a determining factor for deciding the power of the firm in the industry and also the number of firms in the market. Since in this industry, the cost structure is mainly composed of fixed and unavoidable costs therefore new firms will continue to enter the market as long as they can expect to set their price that will at least cover the costs incurred. Therefore, “the higher the sunk fixed and common costs are, the lower is the number of firms in a market, and the higher tends to be the contribution towards the fixed and common costs” (Haucap, 2003, p.3). In the mobile phone industry with barriers existing in the form of cost structure, firms will enter until the market reaches the point where any additional firm cannot expect to function without losses. The firms that already exist are particular regarding their price setting depending on potential and actual entry of new firms in the market. From economic perspective, price structures can be efficient when the number of barriers to new entry is low. However, it has to be understood whether in mobile phone industry the number of barriers is significantly low so as to enable firms to make effective pricing policies. There are two factors that indicate that barriers to new entry in the mobile phone industry are not low, and they make a significant contribution. Firstly, there is limited availability of frequency spectrum, and secondly unwillingness of consumers to shift from one mobile service provider to the other even if such shifting will cause lower bills (Haucap, 2003, p.4). Now, limited availability of frequency spectrum is a major issue when talking about barriers to new entry in the mobile phone industry since mobile phone network cannot function without frequency spectrum. In almost all countries such access to spectrum is regulated by the government, and so whether new firms can enter the market depends on the number of licenses issued by the concerned government. Since mobile phone users remain mostly reluctant to change their mobile service providers this can act as a difficult barrier for new firms. In general, people will remain unwilling to switch their mobile service providers unless the costs involved while switching is less than the price advantage. Switching costs can include service cancellation cost, surrender costs of phone number, and the fee attached for having the number ported. However, today mobile number portability has become free of cost and therefore it has become easier for new firms to enter the industry. This has also enhanced competition for customers in the mobile phone industry (Haucap, 2003, pp.4-6). III. Innovations and market development In this new era of fierce global competition it is vital for any industry to adopt new technologies with changing times. There often remains a huge gap in the technical promise while introducing a new technology and effectively putting it to work and this is a grave concern for the management. A set of challenges is faced by the management to introduce new technology into the organisation (Leonard-Barton & Kraus, 1985). In this time where all over the world there is rapid change of technologies, it is vital to adapt to newer technologies. New technology must meet the need of customers and it must be easy to implement. One such innovation is mobile banking facility. In earlier days banks used to keep customers’ money in vaults and would only meet financial needs of the customers. Then financial data networks were created to facilitate electronic method of transfer of funds through interconnected banking system. Even then the customers had to be personally present in the bank to deposit or retrieve funds. Next ATMs provided the customers to do their banking in various locations. Now, more recently online banking through the internet has become a common occurrence. The latest technology in the line of banking facilities is mobile banking. This technology helps the customers to do activities like transferring funds, checking balances, paying bills from their cell phones. Now customers rarely need to go to the bank to do their banking. (Stair & Reynolds, 2009, p.17). Widespread coverage of mobile phone network makes the mobile phones more accessible to the consumers in relation to the fixed infrastructure needed for ATMs. Mobile banking can prove to be a cost efficient channel for the banks for providing banking services and as such the banks can charge less for transactions. Mobile banking technology can provide the consumers immediate access to any information in relation to their bank accounts. Since mobile banking is cost efficient and will always be in high demand, therefore this can be a positive factor for new entry of firms leading to market development. References Ferguson, P. (1994) Industrial Economic: Issues and Perspectives, NYU Press Haucap, J. (2003) The Economic of Mobile Telephone Regulation, Discussion Paper No.4, Univ. of the Federal Armed Forces, Hamburg Husso, M. (2011) Analysis of Competition in the Mobile Phone Markets of the United States and Europe. Masters thesis, Alto University Luo, J. (2014) Structure-Conduct-Performance, Resource-Based View and Business Strategy. International Journal of Advances in Management Science, 3(4), 113-16 Porter, M. (1981) The Contributions of Industrial Organization to Strategic Management. The Academy of Management Review, 6(4), 609-20 Stair, R.M. and Reynolds, G. (2009) Principles of Information Systems, Cengage Learning Read More