Hi Everyone:

Summer always comes to an end wayyyy too fast. It also always seems to bring the first of the major hurricanes. I hope everyone from the USA reading this is well clear of hurricane Dorian! 

This month's newsletter is about balancing a portfolio strategy with a segmentation strategy. Get it right like Apple has in the smart phone market and watch the profits grow. Get is wrong as Samsung has and market share may soar but profits will be stone cold. This one is called Goldilocks and the three iPhones. Some good end of summer reading.

Enjoy – Cam

CTipping@iibd.com

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(+1) 778 533 8440 M

Volume 19 Newsletter 8

Goldilocks and the three iPhones

Balancing a portfolio strategy with a segmentation strategy is the core of any business strategy and like Goldilocks – you need to get it "just right". Segment the market too coarsely, offering too few product choices and watch your market share go as cold as mama bear's porridge as customers will drift away to competitors who offer more choices. Conversely, go too hot and segment the market too finely offering every segment its own product, and you might see your market share soar while cost rise and your profits tank. There is no magic formula as "balance" varies by market but watch how Apple gets it "just right" in the smart phone market – not too hot and not too cold, while market leader (in units sold) Samsung struggles to make a profit.

In 2007, with just one model of iPhone, Apple launched its first offering to the public. In response to competition (mostly in Asia), Apple added a second model with a larger screen in 2013 and added a third, monster screen model, in 2018. Estimates vary but the consensus is that in early 2019 Apple's three model iPhone strategy garnered approximately 12% of worldwide smart phone sales.Contrast Apple's three-product portfolio strategy with Samsung which is estimated to hold just over 20% worldwide market share. There are 16 different models of smart phones in the Samsung portfolio and in 2018 sales were just shy of 300 million units. The big question is, did Samsung's higher market share translate into superior profits?

Most statistics show that between 2016 and 2018 Apple's profit share was an eye popping 85% to 92%. 1 The nearest competitor, which was not Samsung, held less than 3% of profit share. How can the market leader in units sold not be the profit leader, or at least close?

Part of the answer lies in experience curves which are the backbone of Portfolio Theory. Experience curves were originally discovered by scientists in the aircraft manufacturing industry in the late 1930's and were used to show that when production doubled, unit costs dropped by 20% to 30%. This same phenomenon can be witnessed in businesses around the world including the Smartphone market.Let's do some very rough math using Samsung and Apple data. Samsung manufactures 16 phone models and has approximately 300 million in sales. If each model sold the same volume Samsung would have production runs of 19 million phones (300 million / 16 models = 19 million). Apple manufactures just three models and sells about 200 million units per year meaning their iPhone production runs are just shy of 70 million phones (200 million / 3 = 67 million). Because Apple only manufactures three models of smart phone, they make almost four times as many phones on a production run as Samsung, putting them much further down the experience curve and resulting in a significantly lower unit cost. It has been estimated that unit costs for Samsung are about $200 while Apple's are half that. (See experience curve plot noticing Apple's lower unit cost.) 

Let's take this a step further. Imagine a Samsung outlet and an Apple store are side by side. The Samsung store must stock sixteen models of smart phones while Apple only needs to contend with three. Consider employee training whether for sales staff, who need to be knowledgeable about all products, or for technicians who need to fix them. The impact of having a large portfolio trickles down through the whole value chain. What can we learn from this

1. Customer needs must be balanced with Portfolio management: While the tenet of "satisfy customer needs" is important, it must be balanced with making a profit. While I'm sure Apple would like to offer additional models it's a balancing act – not too hot and not too cold.

2. Know your industry experience curve: Every time production doubles there is a unit cost savings of approximately 20% to 30%. It's very likely in that same range for your company.

3. Experience Curves aren't isolated to manufacturing: A big mistake many of us make is assuming experience curves only apply to manufacturing. Experience curves are also found downstream in sales teams, repair teams, support functions, etc. 

Balancing your portfolio strategy with a good market segmentation strategy is the key element of any company's overall business strategy. Offer too few products and market share could be too cold. Go too hot and offer lots products for every customer whim and watch your costs rise and profit sink. Goldilocks knew she wanted it "just right". Get the balance right and reap the rewards.

SABRE Newsletter 2019.9