Executive summary
The purpose of the report was to analyze the internal and external environment of a chosen firm and provide recommendations for strategic direction based on it. The chosen firm was Huawei, a technology and communications company based in China. The internal environmental analysis included an analysis of the company’s resources, competencies, distinct competencies and competitive advantage. The external environment analysis included its macro-environment analysis that discussed two trends – AI and 5G – within the industry that impacts the firm. The external environment analysis also included the industry analysis that was performed using Porter’s Five Forces Model. The overall analysis found that Huawei has a stronghold in R&D whereas its leading position as the biggest 5G producer is being marred by the sanctions imposed by the US and other countries. The recommendations suggested for the strategic direction of the company focused on improving its PR and enhancing its strong area of R&D.
Introduction
The purpose of the report is to analyze the internal and external environment of a chosen organization and provide recommendations. The organization chosen for the analysis is Huawei, a technology company based in China (Huawei, 2022a). The report first analyzes the organization’s internal environment including its resources and competencies and its strategic capabilities. Based on this analysis, the competitive advantage of the company is then discussed. Then, the external environment is analyzed in terms of macro-environment and industry environment. Porter’s five forces are utilized for the analysis. The report ends with a list of recommendations for the company to change or further modify its strategic direction.
Internal environment analysis
Huawei was established in 1987 and in the initial years, the company dealt primarily with manufacturing phones, switches but expanded over time. It now has various other operations under its name such as communication networks, equipment, and other digital products and services (Huawei, 2022a). The following sections analyze its resources and competencies to understand its strategic capabilities and competitive advantage.
Resources
Huawei boasts of immense resources in terms of finance, organizational or human. It is one of the top technology companies in the world with a revenue of close to 130 billion dollars in the year 2021 (Fortune, 2022a). It receives financial support from the China Development Bank and China EXIM Bank and has also received grants from the Chinese government. However, as per the company’s claims, it is not wholly depended for its financial resources on the bank or on the government(Huawei 2022b). In contrast to this, some reports such as The Wall Street Journal claim that the company has been able to skyrocket its global rise in the telecommunications industry with the financial help of “tens of billions of dollars” from the Chinese government (Yap, 2022). In terms of human resources, the company has 197,000 employees working in various branches across 170 countries (Huawei, 2022a). Other resources include the presence of laboratories and R&D departments in several countries and it boasts of a huge customer base around the world and not just in China.
Competencies
Competencies, as Kabue and Kilika(2016) explain, serve as the link between the current environment and internal resources of a company and although, any two companies might have the same resources, utilizing those in the right manner depict the firm’s competency. In this sense, Huawei has the capability of conducting high level research and development as it has a strong R&D staff. The company held more than 100,000 active patents across more than 40,000 families by the end of 2020, which is among the largest patent portfolios worldwide (Huawei, 2022b). Furthermore, the company has 105,000 employees working in the R&D department that demonstrates the capability it has in this area (Huawei, 2022b). In addition to this, being a Chinese based company, it has the advantage of offering products at cheaper prices than the established rivals by 30 percent lower than the rival companies.
Strategic capabilities
From the resources and competencies analysis, it could be observed that Huawei has, as its strategic capabilities or distinctive competencies, a global presence and a strong R&D department. The firm is among the top technology companies in the world as per Fortune’s global ranking. To be precise, it is currently ranked number 44 across all sectors across the globe, above competitors like Sony, IBM, and Dell among others (Fortune, 2022). Moreover, it has over 3 billion people worldwide as its customer base that further solidifies its global presence (Huawei, 2022b). The R&D however, is the most important core capability of Huawei. From its initiation in 1987, the company has focused primarily on research and innovation. As per a recent Nasdaq report, Huawei is at the top along with Amazon and Alphabet among companies that spend the most in R&D (Nasdaq.com, 2022). It spent around 22 billion dollars in the year 2020 alone on R&D that comprised 15.9 percent of its total revenue. What is more, as many as 2,761 patents were granted to it in 2020, which is more than the top two companies – Amazon (2,244 patents) and Alphabet (1817 patents) (Nasdaq.com, 2022).
Competitive advantage
As Cegliński(2016) elucidate, a firm achieves competitive advantage when it acquires or develops a set of qualities that enables it to outshine its competitors. From this, it could be understood that Huawei has a huge competitive advantage over its competitors as it is among the top technology companies when it comes to the highest spend in R&D department. As it has been found, the firm has been the top firm with regards to being granted patents in 2020. Kuncoro and Suriani (2018) argue that product innovation is one of the drivers of sustainable competitive advantage and Huawei is on top when it comes to product innovation. An example of this is that the company is leading the 5G market by being among the first companies contending to build this next-generation innovation
External environment analysis
The external environment, as Indris and Primiana(2015) succinctly explain, refers to all the events happening outside the firm that has the capability to affect the functions of the company. The authors further explain that several companies are now competing in the global market. The technology changes and the growing capacity to acquire demands companies to be at their toes when implementing and competing responses.
Macro-environment analysis
The macro-environment analysis generally involves analysis of the political, economic, social, technological, legal and environmental factors affecting the company (Sijabat 2019). However, for the purpose of this paper, only the technological factors are taken into consideration and the two technological trends impacting Huawei.
The first trend is the increasing competition within the technology sector for innovation in technology. A McKinsey report finds that innovation in technology has seen the fastest growth and interest by firms in the past three to five years (Mckinsey.com, 2022). The most has been seen in the future of programming, next-level process automation and visualization and future of connectivity. The artificial intelligence (AI) trend continues to remain as the top trend in the technology sector that major tech companies aim to cash in on including Huawei (Mckinsey.com, 2022). All the giant tech companies too are aware of this trend of AI and machine learning and this has caused the firm to invest increasingly on researching new trends in the field. Fortunately for Huawei, R&D is its strong point and hence, the impact of this new trend is mostly positive.
The second most potent trend is 5G. The fifth generation trend has entered not just the telecom and technology but other industries as well for example, automobile, health and education (Verdict.co.uk, 2022). This new trend promises to deliver data speed 10 to 100 times faster than the previous networks such as LTE and 4G (Narcisi, 2022). Huawei, with R&D as its strong point, has already grabbed on the opportunity to focus on 5G and become the first company to promote and deliver it to the customers worldwide. However, with the emergence of the COVID-19 and the related restrictions being imposed throughout the world, this trend has witnessed some delay in deployment and companies have faced many interruptions and losses due to it. In addition, the various allegations of espionage and unfair trade practices against Huawei and many other Chinese companies have further dampened and hampered the excitement concerning 5G (Justice.gov, 2022). As evident thus, the two trends that have an impact on the company include the AI and machine learning and the 5G.
Industry environment analysis
The analysis of Huawei’s industry environment is performed using Michael Porter’s Five Forces that include competition or rivalry intensity among firms, risk posed by potential new entrants, suppliers’ bargaining power, customers’ bargaining power and the threat of substitution.
As Huawei deals in technology, telecom and other ICT related goods and services, it faces extreme competition from companies dealing with similar products and services across the world. Samsung Electronics, Apple Inc., Sony, Ericsson and Nokia are among the top rivals of Huawei (Craft.co, 2022). The company is facing tough competition from these companies especially in the wake up recent controversies in the United States and the consequent shunning of its equipment and services by the country and its allies such as the United Kingdom (The Economic Times, 2022). In the UK, Nokia and Ericsson, the biggest competitors of Huawei are ready to replace it after the government announced that all the existing Huawei products and services will be stripped out by the year 2027 (The Economic Times, 2022).
Potential new entrant threat
For any new company to enter the market, it needs to scale up its R&D and in that aspect, Huawei is the leader as the previous discussions have already mentioned. In the industry in which the company operates, it is largely difficult to achieve the economies of scale and hence, it makes it easier for the already established companies to have an advantage in terms of cost. The new entrants need to spend a lot more on production and thus, this threat could not be considered a string threat for Huawei(Shamout and Elayan 2020). Furthermore, new entrants in this industry have to spend remarkably on advertisements and promotions whereas Huawei already has a loyal customer base and it does not have to think much about the threat posed by the new entrants(Zhang 2021).
Suppliers’ bargaining power
In terms of the bargaining power of suppliers, there is minimum threat to Huawei because the technology and telecom industry has enough number of suppliers as compared to the buyers. A focal firm, as Cho, Ke and Han(2019) mention, might get compensated with an additional share of financial profits by utilizing its dominant bargaining position over its suppliers for its resource contribution. From this perspective as well, Huawei seems to have an advantage over this industry force. The suppliers in the tech industry have little control over the costs or prices. Huawei has the power to switch suppliers if finds the costs to be too high or not up to the standard.
Customers’ bargaining power
When it comes to buyers’ bargaining power, one could state that the threat is a little higher because there are similar companies offering similar products. The bargaining power of buyers is high because they have the ease of switching to another product that is offered with similar specifications and price. Other than product differentiation, Huawei also faces the threat of consumer brand loyalty for rival firms and the brand image of its own. With all the controversies surrounding it, the bargaining power of buyers becomes a greater force (Cfr.org, 2022).
Threat of substitution
The technology industry faces threat within it owing to the presence of numerous companies that manufacture and sell similar products. Companies like Samsung, Apple, HP, IBM, Hitachi and others sell products and services that are similar to Huawei like smartphones, telecom services and so on and hence, there is a threat of substitution and a potential loss of customers(Zhang 2021).
Summary
From the analysis, it could be summarized that due to Huawei’s strong R&D department, it is able to sustain the threats posed by the various industry forces however, the major forces that it needs to be wary of include the threat of substitution and its rival companies. The rivalry is quite strong within the technology industry and there are many firms that have upped their R&D section gaining patents every year. There is substitution to almost every product and service that Huawei offers and this is a major threat as well. Based on this, the following section provides a list of recommendations for the company to follow.
Recommendations
From the above analysis, it is clear that the company uses a combination of strategies that is, it uses both cost leadership and differentiation strategy. Cost leadership is the strategy where the company gains competitive advantage by offering products at lower costs(Anwar 2016). Differentiation is the strategy where a company sells products and services that are unique from others(Anwar 2016). Huawei has stronghold on both these strategies as it boasts of efficient value chain management thus allowing itself to connect with the middle class. However, there are some areas where it needs to work on along with strengthening its current strategy further.
The first recommendation suggested for Huawei is that it should strengthen its public relations (PR) department because as evident from the analysis, the company is facing some major controversies and losing a good number of customers. As per a Reuters reports, many of its rivals in China itself are eyeing to take over Huawei’s customer base by exploiting the controversies faced by the company (Reuters.com, 2022).
Secondly, it is recommended that since it had to lose few of its important 5G markets owing to the sanctions imposed by the US, it spend more on its innovation and technology. As Huang(2019) finds in an analysis of Huawei’s competition strategy, the company focuses primarily on strategic opportunities and makes investments even if it does not produce short-term results. Therefore, continuing to focus on investing in innovation and technology and seizing opportunities is recommended for the company.
Third, it is recommended that Huawei offers better quality in its products so that it is not easily substituted. According to the stats presented by Business Insider magazine, Huawei has the second largest smartphone market in the world after Samsung even though it does not have a strong presence in the US (Business Insider, 2022). This is because the smartphones are unique in terms of design, specs as well as prices. Thus, the company needs to continue this strategy to sustain its competitive advantage.
Lastly, it is recommended that the company increase its customer base by targeting new customers rather than attempting to win those who are already using other brands. As it is evident from the analysis, due to the sanctions imposed by the US, many other countries including the UK have announced stripping Huawei products from the country. Huawei should use its culture of customer-first, as De Cremer and Tao(2022) point out in a Harvard Business Review article, by looking at the unique issues faced by the customers. The company has always considered customers’ problems as its own and this could be utilized to gain new customer base.
Conclusion
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