91022024, 23.06 Case description GLOBAL CHALLENGE Mobilé inc. The US Department of Justice ordered the boards of erector af the major mobil handset manufacturers to damiss an epace thee top ‘management due to years of carte ike behaviour. Investigations found that the companies directors had agreed amengst themselves in secret banquets on issues such as deliberately stagnating technology development plans, pricing the handsets artificial high, and other key matters that ad set the companies in exact the same financial and operational poston. Finally the board of rectors has understood the serious nature of this situation and hired you to compete against the other estuctared companies, “The core operations ofthe companies operating inthe mobile handset manufacturing industry cansat of esearch and development, production and marketing Sales revenues in the previous financial year were abt more then 1 bllon dollars. Oue te colusion,proftablty has been good, and the companies are also generating sufcient amounts of cash. This isa good starting point since it istkel tha the increased competition and rapid technological evolution over the next years wl tax both profitably and cash BACKGROUND HISTORY OF THE INDUSTRY ‘The festintenational cellular mabe telephone network, NM, was introduced in 1981. At the time the transportable mabile phones were heavy nd huge, Towards the end of the 80's actual hand portables came into the market and the era af the mobile phones ingusty began. ‘Many ofthe mobile communications companies have evolved from mukindustry companies ae a result ofthe recession nthe end ofthe 80% and the beginning ofthe 90's when the downward spin ofthe economy slowed down the general economic growth fora couple of years, Despite the economic slowdown, heavy investments in RED were made in the telecemyminictions sector. With the bith of & second generation (26) of mobile telephones, the telecommurications business stared to emetge from other business’ shadow, and on July Ts, 1991 the wolds frst genuine GSM call was placed by the prime mioiter of Find, Hac Moker, tothe mayor of Helsnk!to discus the price of Bale herring, GSMs Ametiean ‘counterpart, COMA, Is the welds second most common mabile phone standard, covering atid ofthe wold ¢ mobile phone subscribers. The constant development of mobile phones inthe 90 made the devices smaller and lighter thei echnical design more complex, and inereased the rurmber of available functions. FOMA, the first 36 (ird generation) network was launched in Japan in 2001 by NTT DoCoM. Thenew technology ‘made possible the ransfer of voice data and nor-icie data. Ths paved the way fr data-based mobil services and started transform th whol industry By 2009 it had become clear thatthe overwhelming growth of data afc could not be sustained wih the existing teennology and industry started locking for new cata-optmized technologies. The fst 4 networks were launched by Sprint inthe US and TelaSonera in Seandinaia, PRESENT DAY Currently the companies have an annual sales ever of about 1Zbilfon USD and du to relate large RAD Investments the companies! handset businesses have developed favourably, Appeling and customer-driven designs have been named a¢ some ofthe key success factors in the bus The companies eel ther products inthe US, Asia, and Europe, Production and R&D have historlaly been located in Atlanta (GA) but recently the companies have als started bung plants in Asia. Some years ago, the possibility to begin production in Europe was investigated as wel. became clear thatthe mare compleate and fexbe labour laws in Europe would make the operations ciel and exaensive To ensure exit io RAD and production, the companies have also actively negotiated agreements for subcontracting pats oftheir production and RED. hitpsisim.cesim comiease-descriptonigelge_case_137sIye=gcSlocal 1891022024, 23:06 Case descrption FUTURE CHALLENGES ‘The pace of change inthe industry has been rapid and grea expectations have been set for new technologies. The overall trend is towards ability with tested communication speeds ofthe 56 technology at 100 megabits per second in metropolitan areas and improved support fr deviceo-device communication. The overall growth potential ofthe industy is good, but development can very heal fam one market o another, The biggest challenge for a mobil handset manufacturer may be keeping up wih technological evolution since RED requkes continuous large investments. Phones have already ong been much more than just devies for taking In seems that not everything can be developed inhouse ané therefore partets for technology licensing are needed. The growth nthe global ‘market wll probably ereste momentum for establishing more production facilis atleast in Asia. ‘As the motile industry evolves into new applications and services, co-operation among industry players has intense, facilitating a faster adoption of mobile services as wel ag market gcowrh forthe etite mobile indus. In recent years the general pubichas become increasingly intrested in ESG matters (Environmental, Social, Governance). The nutri slowly waking upto this ealty and changes are imminent OPERATIONS PRODUCTION ‘Characteristic to high-tech companies, production is complicated and high costs ae incurred nthe beginning phases ofthe production of new ‘models. This, combined with short produc ife-ycles, forces the companies to adapt the production process to manufacture anew product model 188 800n 8 possible, in pureuit of lw costs. Evenualy 8 the compary becomes more acquainted wih a epee tetnology produetion cost per ‘unit wl fal with the learning curve eect. shouldbe ket in mind that when subcontracting production, the learning curve effect i foregone. On the other hang, sine adding new in-house manufacturing capacity comes ita effect with delay, the extra capacity from contact manufacturing can Become very useful. Also, sometimes the contracts ean provide the devices with significartly smaller costs. Anesher point of interest ie that customecs are both mindful ofthe environmental factors of the actual end produc, ad interestes in what was required o produce them. These might not always correlate with each ather. For example, while one teclogy might be mote energy efficient during endsuser operation, might vole more complex production process that requte advanced components, These pcesges might also require a diferent mix of rae metals, and could thus fir worse from a manufacturing perspective Customers naturally appreciate companies that utilize environmental friendly manufacturing processes, but are not too keen on paying fort in the end prodet. Production processes canbe improved to reduce the erironmental impacts out aside from the drt investment costs the Improvements wil slo have temporary drawback, eg. reduced production capac SALES AND MARKETING ‘The companies have tractonaly operated ony nthe U.S. market, Over the last years, sales networks have been established in Asia and Ewope ae well, Marketing plae significant ole in promoting the brend and communicating to congumers about the product Metketing ls pariclaly important inthe US. and Europe. In Asia the effect af promotion isles but sll considerable, Typical matting spending Inthe Indust is 2-5% of Sales revenue R&D Dis extremely important for IT -and other high-tech companies, because ofthe dynamic nature of the industry. Consumers continuously demand new prodvets and the margins fom al products delie rapidly due to tight competion, hitpsiisim.cesim comicase-descriptonigclge_case_137sile=ge8iocale=on_EN 2691022024, 23:06 Case descrption The cornpanies have a choice of performing their own RED or outsourcing the process by purchasing technology licenses forthe technologies and thei related features, The fist step ofthe RED process i o develop the base technology Upon which up o ten Lechnologyspecie product features can be added. Thee is one notable ference between in-house RAD and technology leenses: when RED Is performed intemal the benefits are available nthe next perio. I RAD i eutsourced, the new tecmnology/featre is available immediately ‘The cost of in-house RAD is loner when the process gradual one, comparing to lump-sum investment. Technology feensing fees are one lime payments. The cost of which wil decrease as the technology ages. Atypical company in the industry spends as much at 10% of Sales revenue on RED. It should be noted that RAD expenditure wil nt be captalsed on the balance sheet. Tha all RED expenses ae considered as operating expenses and as such RED investments may cause eubstantal vctuations tothe compare’ PBL HUMAN RESOURCES Intemal RED performed with RED engineers who need tobe hired and retained. At the outset the company's RAD department consists of 200, engineers who can be allocated to diferent projets. There has been plenty of turnover among the engines inthe past due to high rotation of top ‘management and lack of clarity inthe company’s strategy. Going forward, 10-12% turaver rate shouldbe achievable, Ths ia mportant since the company plans to perform internal development projects they need to bath retain their ey people and hire signficant amounts af new engineers. Salary lve, ving and development vestments, ana high ullzation rate all contribute to high employer atvactveness ‘Also, cumulative raining expenditure and lw atetion rate contibute to mere efficient RED workforce. In adition to the more tractional agpectsof HR both the customers and employees have started to pay more attention to beter working conditions and policies. This mandates a careful balance between personnel capac costs, eficiency and public image. Customized traning regimes can help the company prioiize different objectives to best ft its agenda TECHNOLOGIES Sofa, the companies have been manufacturing Technology 1 mobile handset. New mobile networks are developed constant and these wll require new technology handsets. Therefore, steps shouldbe taken to begin developing new technelogies. RAD of new technologies may require relavely large investments, butts crulalto secure a prosperous future forthe compa It shouldbe mentioned thatthe tachnologes are dependent on the network in which they operate in. Thus, Technology 2 phone cannot operate in Technology 1 network infrastructure You should monitor the network coverage forecasts onthe demanc-page before you plan your RAD as fincoates wi are economicaly ible to be introduce. the various technologies FEATURES ‘The underlying technology for mobile handeete Is nat very diferent fom one company to another, 80 product ferentiation Ie dane with product features, These may be, for example design, cover, screen size, processer speed paciic aplication, et. Inthe simulation you decide abou the umber of features. Minimum numberof feaures is one and maximum is en foreach technology Product features have ferent elec o demand in aitferent market areas, TRANSPORTATION AND LOGISTICS Transporation o export markets is handled by an independent eight company and the cost ofthe service cannot be influenced by the teams The otal logistos cost per unit is wansporation cost + tai. There sn logistics cost involved when the good is manufactured and sold inthe “Things ae atl diferent rom an environmental pint of view as transportation will alvays generate CO? emissions. The compary ulizes standardsized cargo containers. They are transported via @ combination of railvays, martime shipping an trucks, The further you need to hitpsiisim.cesim comicase-descriptonigclge_case_137sile=ge8iocale=on_EN a691022024, 23:06 Case descrption tranapor them, he mare CO2 emissions you will generate. Domestic sales generate only 2 faction of what sles requiring intercontinental transport generate. Nevertheless, with the mobilephone industry, te enwkonmental impact per uit sineigiicanty lw for wanspartaion, when compared tote actual production INTERNATIONAL TAXATION Intemational taxation and trensfer pricing are nstve Issues, The companies have created a eystem thet allows some fexbiliy, bu the ulimate purpose ie to even out the costimpact ofthe RAD expenditure. RAD functions ae located n connection tothe production faclties and the costs reallocated on the profit nd logs statements withthe flowing principles Respectively, 10/12 200 mUSD i locstedto the US PAL and 2/12 x 200 mUSD i located tthe Asin PAL While determining transfer prices, multiples (between 1 and 2) are applied tothe rect variable cost of production In practice this means thatthe rect variable cost of production canbe multiplied with 2 number between 1 and 2 and the outcome isthe transfer rie. When used wisely, these ‘mulplirs can algo be used to benef om differences in corporate tax ates in diferent areas. At minimum, the company should use the ‘mulUpliers to take benefit rom any accumulated losses that may have been create. FINANCE In adalion to income fnaneing, the companies can obtain fancing from equity investors and lending institutions. The companies ae listed onthe stock exchange, enabling effective equity Francing by issuing shares. Shareholders expect @ return onthe equty invested inthe form of cvidends and eaptl gains ‘ver the past few ears, the industy has been in rapid growth phi hang, the merease in share price has been remarkable andthe comps years. and shareholdecs have not been able to enjoy large dividends. On the othe res have outperformed the Nasdaq Composite Index over the last couple of You can reward your investors in the form of dividends or share repurchases. Share issues and buybacks ae me vd le according tothe market valuation at begining ofthe Lending instttions povie short- and long-term loans with aniterest rate depending on the company's financial condion, Short-term debt is conaidered tobe the last est, Le, emergency funding, adit slays cates premium over the longterm loan rates You can slo transfer funds between diferent countries by interna oan (Internationa Teasury Management). You may want to use Internal loans if you have accumulated eubstantil cash reserves in Asia or Europe that canbe repatriated and detrbute to the owners, orf for instance you need to finance some plant investments in Asa MARKET AREAS USA USA the local market of Moblé an atthe same Ume its largest matket. The USA is generally krown tobe a leaden highech industries but in ‘the wireless sector the leadership snot that clear due tothe muttuce of diffrent network tachnologes. Product features are curently ese appreciated than In Europ, but acvertising appears to have good response Demand is expected to grow steal about S10% p.a, at eat forthe next 2: years. There seem tobe no reason why growth shu stop even after that According to some ofthe last conservative estimates, in afew years with the Introduction of new technologes, growth in demand may show peaks of upto EUROPE hitpsiisim.cesim comicase-descriptonigclge_case_137style=geSiocal 4691022024, 23:06 Case descrption “The companies have been exprting products to Europe fora couple of years. Production faites will not be established in Europe because of the igh labour costs “The market growths expected to be about 10% pa. and demands expected to grow steally for several years to come. This market appears tobe ‘the most responsive to product features current, ASIA Its predicted that the highest growth potential isin fac n Asia. Currently the market grows at 20% pa, but long-term growth prospects are hard tomake, “The markets gute polarized between highrspenders who always want to have the latest technologies and late adopters who are happy wit thei ld devices. But on average't seems that consumers are curently less responsive to new technologes and features than thelr counterparts in USA and Europe Also the average responslveness to prices higher than elsewhere hntips:ifsim cesim. comicase-descrptonigcige_case_18?style=ge8locale=or_EN 56