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Strengths 

1. Portafone has been around for 60 years and it has demonstrated an ability to "pivot" to focus on entirely different product categories. Whereas it started out producing radios it adapted its offer to changing consumer tastes by focusing on mobiles. That ability to re-orientate strategic focus may serve the company well if it ever feels the need to develop new products such as tablets or indeed, if it wishes to diversify by serving new markets and products by going into the production of batteries or other components for example.

 

2. The company sells worldwide and is less affected by any one economy/geographic region suffering from economic downturns. Moreover, we're told it is one of  the largest sellers of phones in the world.

 

3. Portafone is registered on the Farland stock exchange and as a consequence, will be subject to the regulations and scrutiny that go with being a publicly-listed enterprise. While burdensome, such scrutiny ultimately serves the company well as the public can be largely confident that the financial information it provides fairly and accurately reflects the performance and position of the firm. Furthermore, Portafone is a profitable company with a solid balance sheet consisting of a strong cash position and few major concerns. Sales growth has been impressive in recent years (particularly over the last year where units sold jumped from around 58 million units to around 82 million units) considering global growth is pretty anaemic.

 

Weaknesses

1. Because of stalling global growth it's unlikely that revenues will continue to grow at the rate that Portafone has registered in the last year. Therefore it's vital that they control cost of materials. While these costs have not spiralled out of control they have grown at the same pace as revenues thus nullifying any improvement in gross profit. It looks to me that they have high component costs. They may well be relying on a supplier/suppliers with high power. In fact, in the mobile phone market Samsung is one such supplier with enormous power, as they manufacture a number of key components used by most other mobile phone makers. Back in the mid-1990s, Samsung took the decision to start researching, designing and manufacturing electrical components. They are now reaping the benefits as they are able to serve others in the market and they themselves are guaranteed a supply of components at cost. Potentially, Portafone could adopt a similar strategy itself but it would require enormous amounts of R&D expenditure and could take years to pull off.

 

2. The networks (e.g. Orange, O2, Vodafone, AT&T etc) stand between mobile manufacturers such as Portafone and the general consuming public. Because not just anyone can become a network given the fact that it's such a "complicated and expensive undertaking", there are not many network providers out there. The networks can also easily switch between phone manufacturers and they use their size and clout to negotiate discounted bulk purchases of mobile phones from the manufacturers. The networks also supply the mobile phone manufacturers with the infrastructure and reception without which their goods would not function. So, for all of these reasons the networks wield great power and Portafone and all other manufacturers are very reliant on them.

 

3. Inventory is high and on an upward trend. This is slightly concerning in a technological, fast-moving industry because products quickly become old-hat. Too much stock and Portafone runs the risk of getting stuck with obsolete goods. A leader in inventory management is Apple whose CEO Tim Cook was actually Chief Operations Officer before being appointed as head of the company. Cook believes that when it comes to technology such as smartphones, tablets and laptops, inventory deprecates very, very quickly, losing 1-2% of value each week - “inventory is fundamentally evil” he famously once stated. "You kind of want to manage it like you're in the dairy business. If it gets past its freshness date, you have a problem." Failing the employment of a better inventory management system, perhaps Portafone could look to get rid of older inventory by selling to networks looking for phones to sell to pay-as-you-go clients. These phones are not as heavily discounted by the networks for the end consumer so Portafone would not have to sell at such a big discount to the network. Worryingly, Portafone doesn't seem to have anyone at senior level dedicated to logistics, so it seems there is definitely a lack of focus on what is a crucial area.

 

4. In general it seems to me that Portafone's assets are not generating the returns they could. We have spoken about the high inventory levels and the potential problems there, but it's questionable whether it's optimal to have so much cash on hand which is not likely to be generating much of a return as it sits in a bank account. It's interesting to employ the asset turnover ratio (revenues/capital employed) which measures a firm's efficiency in generating revenues from its asset base. For example, rival firm Maltone is much lighter on assets but is generating almost identical revenues to the more asset-intensive Portafone. In 2014, Maltone's asset turnover ratio was an impressive 64% against Portafone's 17%. Portafone has closed the gap somewhat in 2015 with its new ratio being 22% against Maltone's 45% but there is still a way to go for Portafone.

 

Opportunities

1. In much the same way that Apple outsources the manufacturing of its mobile phones to Foxconn in China and focuses solely on design in California, Portafone could follow suit. We are told that design is a very important element of the perception of a phone and that perfectly functional phones are cast aside as the consumer opts for the latest must-have gadget/fashion accessory. By outsourcing manufacturing Portafone could double down on design and really up their game to compete with some of the more fashionable brands in the market. In this way, Portafone would be differentiating their products in a crowded marketplace where the consumer has tremendous power to switch depending on fashions.

 

2. Portafone has proven itself adept at new product developments in the past and it may well be looking into the possibility of launching new offers. An obvious choice would be to roll out a tablet computer offer for example. The technology would be very similar so would not require such a radical overhaul of production facilities. However, this is already a crowded space with many mobile manufacturers already offering tablet devices with the market predicted to grow around 23% in 2016 and 2017 (both years combined) before going into decline. So, it may be a little late to join that market. Another option is for Portafone to branch out into the production of smartwatches and fitness/activity trackers. Studies suggest that currently consumers are slightly frustrated with these devices as they fail to live up to the initial hype surrounding them but that expectation is high for the next generation of devices. If Portafone was willing to invest the time and money in researching and developing prototypes it could be amongst the first-movers in the next very exciting phase for these goods.

 

3. A more abrupt departure would be taken if Portafone were to opt for what the Ansoff Matrix refers to as "Diversification". In this scenario, Portafone would both serve new markets and make new products. There are a few options here:

 

• Portafone could very usefully consider launching intensive investigations into the production of superior batteries, perhaps forming an alliance with another company. In fact, Diand (the new entrant whose batteries are catching fire) may be the perfect partner. Reeling from the bad publicity following the incidents, they may welcome the advances of an established, reputable company such as Portafone. After all, Diand has a new, longer-life battery. A few tweaks and it could potentially be a game-changing component. Any company that could equip their phones with longer-lasting, slim, safer batteries would gain a significant competitive advantage. Furthermore, Portafone could go into production of batteries themselves, patent the technology and sell to other phone manufacturers.

• Portafone could move into the development of apps, perhaps forming an alliance with a current app-maker. This is a high-growth area and app-makers have become increasingly powerful in recent years as consumers are more interested in having the right apps than the various hardware components that make up their mobile phone (which they now take for granted as being more or less one and the same regardless of phone manufacturer)

 

Clearly though, any such radical developments/breaks from their current product will require a much larger spend on R&D. 

 

4. One way to reduce the buyer power of the networks is to team up with one and sign an exclusive agreement whereby all Portafone phones were available solely through that one network. Portafone could agree on guaranteed quotas of sales and the network would not just be able to suddenly switch manufacturers as they would be contractually-bound to Portafone. 

 

5. We are told early on in the pre-seen that employees are encouraged to engage with the community and you provide teaching support at Capital City University. It is unclear what other links, if any, Portafone has with universities but tie-ups between companies and third-level institutions are common and often fruitful, particularly in high-tech areas. Portafone seems to have a slight problem with innovation and is holding back on R&D spending. A relatively inexpensive way to ramp up innovation would be to collaborate with highly-qualified third parties. Moreover, Portafone could steal a march on the competition by identifying high-potential students who could come to work for them after graduation. The battle for skilled workers in the industry is fierce and Portafone could potentially gain a lot in allying itself to learning institutions.

 

6. If it so wishes, Portafone has the ability to go on a spending spree! We have talked about that pile of cash sitting in a bank account not doing very much. The company has also taken on extra debt in 2015 and has issued shares so it has something of a war chest. One possibility is the acquisition of a rival and I wouldn't be surprised to see something come up on exam day on the potential takeover of Maltone whose growth is stalling but who are particularly adept at putting their assets to work. Alternatively, Portafone could vertically integrate a component manufacturer and look to sell to other mobile manufacturers and cut its own component expenses in the process.

 

Threats

1. Growth in the global mobile smartphone market is running at around 0.7% per year currently and has really stalled in developed economies and is even slowing in large Asian markets like China. With so many competitors it's getting harder to generate impressive sales growth. The technology in phones is already so good that it's hard to make the kind of big leaps that would set one manufacturer apart from the rest. In other words, all the low-hanging fruit has been picked from the tree and only incremental technical gains are currently being made by manufacturers. As a consequence, it's hard for a manufacturer to differentiate its product on purely technical features such as camera quality, messaging superiority or operating system (most manufacturers use the same open source system anyway). One need only think of the disappointment generated after the recent iPhone 7 launch where many complained as it seemed all Apple had done was re-hash the same old phone with the need for an expensive set of wireless headphones.

 

2. As it stands, the slim batteries that are standard in the industry need to be regularly charged and are prone to overheating, causing the potential in extreme cases of fire or explosion. This is a threat for the industry as a whole but perhaps Portafone in particular is running a risk as they seem to pay so little for their batteries. In the section on 'The Cost of Manufacturing a Mobile Phone' on page 12 of the pre-seen, you will notice that the battery has the lowest cost of all components at just F$5.04. Has Portafone been skimping on battery costs? If so, it may not be long before they suffer a similar fate as Diand who we are told in the article on page 21, has produced a battery that is catching fire.

 

3. The article titled 'Phones Cause Separation Anxiety' on page 20 of the pre-seen hints at the rising concerns of the general public regarding over-reliance on mobile phones and how users may be becoming too attached to their devices. There have always been concerns about new technology but the potential for disruption and bad publicity for mobile phones is particularly dangerous given their ubiquity. Portafone could try to pre-empt such news stories by launching positive promotional campaigns highlighting the many positives of mobile phones in allowing people to communicate more effectively, stay in touch with loved ones etc. They could even push for more responsible use of mobile phones in much the same way as betting companies are encouraging their customers to gamble responsibly. In this way they could get ahead of authorities who may be tempted to impose onerous conditions on mobile phone companies if they start to side with the scare-mongerers.

 

4. Portafone has held down R&D expenditure in 2015. While this has contributed to a fatter net profit figure for the year Portafone may well be sowing the seeds of potential issues in the future. This is a high-tech industry where innovation and intellectual property matter and Portafone is skimping on a key area. The flattening off of R&D spending along with the decline in intangible assets in the form of patents and trademarks points to a firm that is not leading the way in innovation and that may hurt Portafone in the coming years.

 

A few final points: it's interesting that batteries are mentioned time and again in the pre-seen. Given the very recent problems with the Samsung Galaxy Note 7's exploding batteries and the repeat of those issues, I imagine the examiner will undoubtedly bring issues surrounding batteries up in at least a couple of variants. Consider the low price Portafone pays for its own batteries and the possibility that they will encounter issues like those of Diand in the pre-seen and Samsung in real-life. Does Portafone have the resources to implement a massive recall of faulty phones and could it withstand the damage to its reputation? How can it lessen the threat of such a problem occurring? 

Don't forget to check out our MCS Nov16 Industry Overview and MCS Nov16 Financial Analysis articles!

 

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