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Samsung (OTC:SSNLF) and Apple (NASDAQ:AAPL) are two leading players of the smartphone industry (see the table below). Apple is the most profitable, while Samsung is the largest player (by revenue as well as volumes) in the industry. Samsung is not only the largest but also is the most competitive player in the industry. Samsung is becoming more and more competitive due to its rising scale and integrated operations as it makes chips and screens for most of its mobile phones in-house.

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Samsung may well be the most competitive player, but Apple is the most profitable player because Apple is the king of the premium segment of the market. Average selling price of iPhone is much higher than its competitors, and it yields very high margins for Apple.

Despite all the efforts like, lower prices, aggressive marketing, innovations, etc. Samsung so far has not been able to challenge Apple's dominance in the premium segment. Samsung reported a muted growth in the sales of its premium handsets for the last reported quarter, whereas Apple reported an 8% sequential rise in the iPhone shipments during the same period.

(Source: Companies documents)

There are multiple reasons behind Apple's dominance in the high-end smartphone segment such as its brand image and its premium hardware as well as software quality (iOS). Competitors may argue this, but the dominance of Apple shows that in the buyer's mind Apple is a premium brand, which offers innovative technologies. The introduction of the industry's first mobile with 64-bit chip (A7 Application Processor) by Apple further strengths its brand image among customers.

Samsung is under constant pressure to break Apple's dominance in the high-end smartphone segment. Recently, during a rare Analyst Day meeting Samsung gave a briefing on its future strategy that may well become a big concern for Apple in the future. Samsung's strategy is primarily focused on Apple's strength. In simple words, Samsung wants to challenge Apple's dominance by following Apple's footsteps.

Samsung's key strategic shift:

Samsung is making few key strategic shifts.

(Source: Company's documents)

  • Shifting its focus from hardware to software:

The company plans to shift its focus from hardware to software. This means that in the future the company will equally focus on both hardware and software sides of the business. This is a big shift for the company, as so far the company concentrated mainly on the hardware side of the business and has little presence in the software side of the business. With the shift, the company intends to compete with companies like Apple. Samsung understands that if it wants to establish itself in the high-end of the mobile smartphone segment then it has to concentrate more on the software side of the business, as this is an area where the company lags way behind Apple. Apple has a strong presence in the software. Its mobile platform is among the top two mobile operating systems and also has a lot of popular apps/service available for Apple users.

  • In-house to open innovations:

The company knows that it is years behind Apple in some areas particularly software (iOS). No matter how eager the company may be, but it will take lots of time for the company to get even closer to Apple in software quality. The company is well aware of the fact and that is why it is ready to enhance its software quality by open innovations, which may well mean acquisitions. The company holds billions of dollars of free cash, and it has already made it clear that it will use this cash for acquisitions. The company also made it clear that its acquisition strategy will not aim at revenue or profit, but will be aimed at:

  1. Reinforcement of current business
  2. New business opportunities
  3. Talent

So the company is ready to invest in the future through acquisitions. The quality acquisitions may well cover the software quality gap between the company and Apple in a quick time.

Sharper focus on IP (intellectual property) protection:

The most important area that is increasingly getting the company's focus is IP protection. IP is the most important thing in any sector and the company is giving it deserved attention. Persistent increase in IP risk due to country specific regulations and competitor's aggression often leads to patent infringements and complications. The company intends to address these issues by a better focus on IP right protection in the very early stage of the product/technology development. The company has engaged about 600 patent experts in its three regional centers.

IP protection is one of the key needs for any technology driven company. IP helps to differentiate a company from its competitors by allowing it to offer innovative as well as unique products and features, which are the key requirements for a premium brand image.

Conclusion:

In the last few quarters, Samsung is gained share in the smartphone market at the cost of Apple but without hurting Apple. The growth in Samsung's market-share is primarily driven by sales of the budget smartphones where Apple has no presence. Samsung has not been able to increase its presence in the premium smartphone market as intended due to weaknesses such as lack of premium brand image, lack of differentiated offerings, high focus on the emerging markets, lack of premium software offerings, etc.

With the new strategy the company is hoping that it can overcome most of weaknesses in the future. The company is also focusing on few more things that can further accelerate its journey towards higher share in the high-end segment. It is developing 64-bit SoC to challenge Apple's 64-bit chip. It is also moving ahead in term of Flexible display and wearable technology.

All in all, Samsung is preparing to establish itself in Apple dominated market by following Apple's footsteps, which can be a big worry for Apple. Not only for Apple, the strategy can be a concern for all big players in the smartphone market such as Google (NASDAQ:GOOG) and Microsoft (NASDAQ:MSFT). The strategy shows that Samsung has the renewed thrust for growth and this time it also wants to be a key player in not just hardware but also in the software segment.

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This article reflects the personal views of the author about the company and one must read offer prospectus and consult its financial adviser before making any decision.

Source: Samsung's New Strategy Is A Worry For Apple