TomTom A strategic analysis
Table of Contents List of Tables.........................................................................................................................................ii List of Figures.......................................................................................................................................ii Executive summary..............................................................................................................................iii 1. Introduction and company overview..................................................................................................1 1.1 Introduction.................................................................................................. 1 1.2 Company overview....................................................................................... 1 Table 1: Summary of TomTom's key financial data..............................................2 2. Mandate.............................................................................................................................................2 2.1 Mission/Purpose............................................................................................ 2 2.1 Vision/Goals.................................................................................................. 2 2.3 Values/Ethics................................................................................................ 3 2.4 Stakeholder analysis..................................................................................... 3 Figure 1: TomTom’s stakeholders........................................................................4 3. External analysis................................................................................................................................4 3.1 Porters Five Force analysis............................................................................4 Figure 2: Porter's Five Forces framework............................................................5 3.1.1 Threat of entry....................................................................................... 5 3.1.2 Threat of substitutes.............................................................................. 6 3.1.3 The power of buyers...............................................................................6 3.1.4 The power of suppliers...........................................................................6 3.1.5 Competitive rivalry.................................................................................7 3.2 PESTEL analysis............................................................................................ 7 Table 2: PESTEL Analysis.................................................................................... 8 4. Internal analysis.................................................................................................................................9 4.1 Strengths...................................................................................................... 9 4.2 Weaknesses................................................................................................ 10 4.3 Opportunities.............................................................................................. 10 4.4 Threats....................................................................................................... 10 5. Strategic options..............................................................................................................................11 5.1 Enhancement and Development of the non-PND category.........................12 Table 3: Marketing summary of TomTom's software applications......................13 5.2 Entering new markets.................................................................................13 5.2.1 Strategic direction of entering new markets........................................14 Figure 3: The Ansoff Matrix...............................................................................14 Figure 4: The expanding middle class of the BRICs..........................................16 5.2.2 Marketing and strategy development...................................................16 6.0 References.....................................................................................................................................18 7.0 Appendices....................................................................................................................................20 Appendix 1....................................................................................................... 20 Appendix 2....................................................................................................... 21 Appendix 3....................................................................................................... 21
List of Tables Table 1: Summary of TomTom's key financial data...................................................................4 Table 2: PESTEL Analysis.......................................................................................................11 Table 3: Marketing summary of TomTom's software applications..........................................15 List of Figures Figure 1: TomTom’s stakeholders..............................................................................................3 Figure 2: Porter's Five Forces framework..................................................................................4 Figure 3: The Ansoff Matrix......................................................................................................9 Figure 4: The expanding middle class of the BRICs...............................................................10
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Executive summary TomTom is facing competition from everywhere. This report gives a strategic analysis of TomTom and ultimately giving strategic options which the company can follow in order to remain competitive and guarantee its survival in the market. In the Introduction and Company background it emerges that TomTom, for a navigation technology company, has good experience having been established in 1991. It has a diverse and global workforce which is an asset. On its Mandate, TomTom’s mission touches on providing users with great navigation experience. Its vales centre on leaving a positive impact on society. Further, the company acknowledges the importance of all its stakeholders to its business. Regarding the company’s External analysis, two tools are employed: Porter’s Five Forces and PESTEL analysis. In a nutshell, Porter’s five forces highlight that the industry is still attractive on overall. However, there is the very serious is the threat it faces from new competition. From PESTEL, the most serious issue is that of legislative measures considered by some countries that might ban the sale of navigation hardware. Regarding the company’s Internal analysis, SWOT analysis is used. The highlight here is that the company has strength in the name of a good brand image. However, it has the serious threats of a mature European and U.S market, potentially adverse legislation in some countries, and serious competition from substitute products such as standalone navigation software for Smartphones. Strategic options are therefore offered in accordance with analysis made and especially to counter the identified threats. The two strategic options suggested for TomTom to pursue are:
Product Development - Enhancement and Development of the non-PND category.
Entering new markets
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1. Introduction and company overview 1.1 Introduction Advances in technology have opened up access to channels of travel. By air travel for instance, it is possible for more people to move from one point to another for reasons ranging from tourism to work engagements. However, travel comes with the increased problem of navigating in foreign locations such that the danger of getting lost is always present. This is compounded by proliferation of numerous roads, buildings, and other man-made structures especially in cities and towns in many parts of the world. This has brought about the need for reliable navigation devices to provide accurate and timely navigation aid for potential users.
1.2 Company overview Headquartered in Amsterdam, Netherlands, TomTom is a company that manufactures automotive navigation systems that includes stand-alone personal navigation devices (PNDs) and also develops software for use in cell phones and for personal digital assistants (PDAs). Founded in 1991 by three entrepreneurs, TomTom is currently one of the leading companies in this sector. It currently employees 3,500 employees worldwide and sells its products to more than 35 countries in the world. The company has four business units/segments: consumer, automotive, licensing, and business solutions segments. The company has over the years managed to build a strong brand through its high quality products but is facing several challenges such as increasing competition and declining PNG sales (TomTom, 2013). Table 1 summarises TomTom’s key financial highlights.
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Table 1: Summary of TomTom's key financial data (€ in millions) Total Revenue Cost of sales Gross profit Total operating expenses Profit before tax Net profit after tax
2008 1,057 186 871 627 244 143
2009 1,480 749 731 510 112 86
2010 1,521 777 744 558 134 108
2011 1,273 634 640 1,064 -441 -439
2012 1,057 502 555 485 61 129
Source: Data extracted from TomTom 2010; TomTom 2012.
2. Mandate 2.1 Mission/Purpose According to the company annual report, TomTom’s mission statement is “to provide all drivers with the world’s best navigation experience” (TomTom, 2010). The company’s product strategy is to focus on investing in research and development. Consequently, the company focuses on investing in developing its integrated common platform to support its product strategy. By owning the entire process that concerns software technology, content creation, to product development and maintenance, TomTom has a good level of competitive advantage. This framework also enables the company to provide good navigation experience to consumers through its well developed mapping and traffic information guidance technology (TomTom, 2012).
2.1 Vision/Goals TomTom’s vision is to “ improve people’s lives by transforming navigation from a ‘don’t-getlost solution’ into a true travel companion that gets people from one place to another safer, faster, cheaper, and better informed” (Hoffman, 2010). 2
TomTom’s strategy currently is to re-establish revenue growth by enhancing sales of nonPND product revenues whilst trying to contain declining revenues in PND unit sales. Accordingly, part of TomTom’s strategy is to increasingly become a software, content, and services organisation. The company realises that it cannot achieve this quest without innovation (TomTom, 2012). 2.3 Values/Ethics TomTom’s values are embodied in its corporate social responsibility (CSR) strategy whose overall strategy is “to ensure the impact of our business on society is a positive one” (TomTom, 2013). Accordingly, TomTom focuses on three areas: 1) Environmental impact - TomTom aims at managing its environmental impact by minimising the effects of its business activities on the planet (TomTom, 2013b). 2) Supply chain – TomTom attaches importance to labour conditions through its labour engagement program and promoting employee communication through social media. Other relevant areas include health, human rights, safety and environment. 3) Community giving – for instance, TomTom donates its PNDs (Personal Navigation Device) to charitable organisations that operate in areas of disaster emergency and disadvantaged youth (TomTom, 2012). 2.4 Stakeholder analysis TomTom recognises the need of maintaining close relationships with all its stakeholders. TomTom’s most important stakeholders include consumers, employees, shareholders, suppliers and business partners (TomTom, 2012). However, it can be delineated from the company’s annual report and website that there are other stakeholders mentioned who are also important. These include regulators, communities, media, and NGOs (TomTom, 2012; TomTom, 2013). To facilitate communication with its important stakeholders, the company
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holds one annual general meeting and about ten supervisory board meetings which handles all press releases. TomTom’s stakeholders can be portrayed in a stakeholder radar screen 1 (figure 1) which shows the relative importance of TomTom’s stakeholders. In this format, importance of stakeholders is shown by the distance from the centre –the most important stakeholders are located near the centre.
Figure 1: TomTom’s stakeholders
Regulators Partners
Media
Customers
TomTom Ltd
Suppliers
Employees
Community NGOs
3. External analysis 3.1 Porters Five Force analysis TomTom’s external analysis can be done using Porters five forces framework. Johnson et al., (2008) posit that “the five forces framework helps identify the attractiveness of an industry or sector in terms of competitive forces” (p.59). This is portrayed in figure 2.
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This format is borrowed from Regester and Larkin’s (2008, p.46) stakeholder radar screen.
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Figure 2: Porter's Five Forces framework
Source: Extracted from Johnson, Scholes & Whittington, (2008, p.258).
3.1.1 Threat of entry TomTom is in the consumer electronics industry, specifically the navigation systems sector. Here, there are high barriers to entry due to: Scale and experience: According to the case study, there are three main large players TomTom, Garmin, and Magellan with 24, 45 and 15% market share respectively (Hoffman, 2010). These have acquired experience and economise of scale which new entrants might find difficult to match. Differentiation: by providing consumers with a differentiated product of higher value, TomTom (and the other two large players) have good customer loyalty which new entrants might find hard to beat.
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3.1.2 Threat of substitutes The greatest threat to TomTom lies in substitutes. From the case study, it is evident that there are other platforms that can offer the navigation services that TomTom does albeit differently through the use of cell phones and smartphones (Hoffman, 2010). The threat lies in the fact that independent software developers can make applications which users can install in their smartphones to enable their phones to act as navigation devices through the use GPS (global positioning system). Essentially, there is no need for a navigation device – as provided by companies such as TomTom. The overall effect is the reduction of the industry’s attractiveness. 3.1.3 The power of buyers TomTom’s immediate buyers have high buying power. The company mainly depends on retailers and distributors to sell its products to the ultimate consumer (the end-user). Further, the company directs its marketing expenditure towards business-to-business (B2B) advertising (Hoffman, 2010). Selling to a few retailers or distributors implies that they possess high buying power because they are fewer and more concentrated. Consequently, they can and do put pressure (or aggressively negotiate) for lower prices which can effectively reduce the company’s profit margins. This therefore reduces the industry’s attractiveness. 3.1.4 The power of suppliers Concentrated buyers: The case study notes that TomTom’s supply chain and distribution model is mainly outsourced (Hoffman, 2010). However, the company still depends on a small number of third parties and a few sole suppliers for supply of vital components and manufacturing. This means that TomTom dependency on such suppliers is high. High switching costs: In connection with the above point, it is therefore expensive for TomTom to switch suppliers without incurring increased costs. For instance, should
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suppliers’ increase their prices for instance would result in the erosion of TomTom’s revenues. 3.1.5 Competitive rivalry There is significant competitive rivalry in the industry. These are organisations with the same product offerings aimed at the same consumer. Factors to consider here include: Competitor balance: management thinking dictates that competition increases where competitors are roughly the same size (Johnson et al., 2008, p.64). Although TomTom’s competitors market share is not exactly equal (see section 3.1.1), there is still intense competition as each company tries to increase its market share at the expense of the other. This is best exemplified in the case study when Garmin, TomTom’s biggest competitor engaged in a head-to-head battle for the acquisition of Tele Atlas with TomTom (Hoffman, 2010-5). Industry growth rate: when an industry is growing strongly, an organisation can grow correspondingly but during lean times, growth may be at the expense of a competing rival. The case study notes that the U.S and European market in the personal navigation device market is slow and starting to decline (Hoffman, 2010). This is a recipe for intense competition characterised by price competition and decreased revenues.
3.2 PESTEL analysis The PESTEL framework categorises environmental influences into six main types: political, economic, social, technological, environmental and legal (Johnson et al., 2008, p.64).
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Table 2: PESTEL Analysis
4. Internal analysis TomTom’s internal analysis can be done using a SWOT2 analysis which is a comparison of a company’s strengths, weaknesses, opportunities and threats (Hill & Jones, 2010, p. 19 + more 2
According to Hill & Jones (2010), “internal analysis focuses on reviewing the resources, capabilities, and competencies of a company. The goal is to identify the strengths and weaknesses of the company” (p.19).
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ref). With regard to SWOT, Hill & Jones (2010) posit that “the general purpose is to identify the strategies to exploit external opportunities, counter threats, build on and protect company strengths, and eradicate weaknesses” (p.20).
4.1 Strengths Brand name – TomTom has a good brand name. Alongside Tele Atlas, the company has a combined experience of almost 30 years. Its routing algorithms and Tele Atlas’ digital mapping technology are world-class. Diverse workforce – TomTom has a global workforce of 3, 500 in 40 countries. This workforce is diverse in nature and therefore enables the company to compete in international markets. Good products – the company has good products with wide variety. TomTom is known for products with good maps, better routing capabilities, and better real-time traffic information. Mergers and acquisitions - TomTom has positioned itself well with strategic mergers. For instance, its merger with Tele Atlas has improved its digital mapping capabilities and merging with advanced integrated solutions has improved its route guidance systems. Good technology – TomTom is an innovation company with several patents to its name. It has developed advanced technology in its three stronghold areas of digital mapping, routing technology, and dynamic information. 4.2 Weaknesses Financial performance - generally, total revenues and profits are declining. Among other factors this is caused by decline in sales of PNDs (see table 1). B2C marketing – essentially operating on a B2B model, TomTom sells its products through retailers and distributors. It has not developed ways of directly selling to consumers e.g. through online shopping (Hoffman, 2010).
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Third parties, outsourcing – although the company’s supply chain is outsourced, it relies on a limited number of third party providers and in some cases sole suppliers for instance component suppliers. This increases risk due to increased dependency. 4.3 Opportunities Changing trends – for instance, many people including the youth like to use phones and smartphones with multiple or integrated capabilities in one device for instance, social networking and navigation capabilities. Untapped markets - there is potential for growth in markets such as the United States. For instance, only 35% of adults in the United States own a navigation device either of a phone, a standalone device, or in a car. 4.4 Threats Competition – the company faces traditional competition from well established companies such as Garmin and Magellan which compete directly with TomTom for the same customers. Further, there is new competition in the form of substitutes offered by a) smartphones pre-fixed with GPS receiver capabilities; b) subscription navigation services by AT & T Navigator; c) online navigation services such as Google Maps and Yahoo Maps which offered as free services; d) built-in car navigation devices in some vehicle brands which are sold by strong brand names such as Kenwood and Pioneer. Adverse legislation – there are potentially crippling legislations concerning PNDs. For example, Canada and Australia are considering banning all PND devices in vehicles due to the distractions they cause while driving. Increasing lobbying by “green” activists can also result in legislation which increases the cost of adapting to. Mature markets - the U.S and European markets show signs of maturity especially in terms of personal navigation devices. The case study highlights that sales to Europe have dropped 21% (Hoffman, 2010).
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5. Strategic options From the analyses conducted, it emerges that there are serious issues or threats that TomTom faces: 1. From Porter’s five forces, it is clear that there is serious competition from substitute products such as independent navigation software applications that can easily be installed in Smartphones and cell phones. Therefore, one strategic option is to develop and enhance new products or services especially software applications for Smartphones. 2. It is also evident from Porters five forces that there is a decline of European and U.S markets since they have matured. It is unlikely that these markets shall improve – at least not with the same products. Accordingly one strategic option is to seek new markets. There are other issues identified for instance, unfavourable legislation in PESTEL and Five Forces but it can be argued that other companies face the same threats. From SWOT it is evident that the company has a good brand image. This will help the company in pursuing the two strategic options recommended.
5.1 Enhancement and Development of the non-PND category The case study highlights the declining sales in Personal Navigation Devices (PNGs), which essentially comprise the hardware section (Hoffman, 2010). For instance, sales comparisons of the first quarters of 2008 and 2009 show that revenues from sales of PNDs fell from €234 million to €141 million, representing a 40% decline in revenue (see appendix 3). Although this appears as a one-off drop, this trend is likely to continue because:
Changing consumer trends – as the case study highlights, consumer trends are changing. More people are preferring devices with multi-functional capabilities such as Smartphones.
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Increasing competition - As highlighted in the study, there is increasing competition from other platforms using GPS technology especially from cell phones and smart phones for instance Google and phone manufacturers such as Nokia.
Accordingly, TomTom needs to embark on a strategy to enhance the non-PND category quickly to enable the company to produce reliable and affordable standalone navigation software for use in smartphones and cell phones. In this regard, the company shall need to do the following: 1) Specialised technicians - TomTom shall need to look for more highly skilled software engineers for this purpose. There should be a small team that can develop relevant software applications for use in smartphones globally. 2) Marketing – the enhanced software applications need careful marketing plans. The table below summarises the marketing of TomTom’s new software applications.
Table 3: Marketing summary of TomTom's software applications Area of marketing Market segmentation
Market targeting
Specific Remarks marketing points Geographic Aim for European and North American markets initially. Demographic Target middle to upper middle class people. Psychographic Identify market segment that comprises tech-savvy people. Evaluation of Segment size and growth – the identified market market segments segment above is large and growing Segment structural attractiveness – TomTom should rely on its scale & experience and differentiation of product by quality to create barriers to entry in industry Company objectives and resources – TomTom has stable finances and a good human resource base. Target market Differentiation - is the best strategy to follow since 12
strategies
Positioning for Possible competitive competitive advantages advantages Differentiation of offer
Selection of the right competitive advantages
the company has superior product quality and experience, for instance, in digital mapping. However, the company should charge a reasonable price to avoid loosing out to Google whose applications are free of charge. Ideally, this will be for consumers who want advanced userexperiences but at an affordable price range. TomTom can provide software that consumers will value and shall be willing to pay a small price to purchase. Channel differentiation – TomTom should take advantage of its expertise and performance of its product to position its services. Number of differences to promote – TomTom should promote one major difference i.e. “Provision of superior navigation services”. Differences to promote – the company should position its product as superior but affordable.
5.2 Entering new markets As indicated by case study, European and North American markets show signs of maturing (Hoffman, 2010). Comparing 2008 and 2009, it is seen that revenues for Europe and North America fell by 22 and 52% respectively (see appendix 2). It can be deduced from the case study that the main reasons for this are a) economic uncertainty; and b) reduced consumer purchasing power; c) changing preferences by the consumer. It is expected that the situation will not improve. Therefore, TomTom needs to enter new markets.
5.2.1 Strategic direction of entering new markets Here, the Ansoff matrix (see figure 3) can be used to assess the issues of products and markets.
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Figure 3: The Ansoff Matrix
Source: Extracted from Johnson et al. (2008, p.258).
Looking at the possibilities of the Ansoff matrix it is recommended that: 1) Market consolidation – Since TomTom is selling existing products in existing markets (Quadrant A of figure 3), the company should maintain its market share in these regions. It should not spend excess funds for instance, in advertising, in an attempt to boost sales. Such funds are best utilised elsewhere. 2) Market development - TomTom should try to venture into new markets by selling its existing products into new markets (Quadrant C). Under market development, emerging markets for instance, markets in the Far East portend the greatest potential. However, countries with greatest potential include the BRIC countries (Brazil, Russia, India, and China). Other countries of interest that can be considered at a later stage are some newly industrialised and industrialising countries such as Malaysia, Singapore, Taiwan, South Korea, Mexico, South Africa, and Indonesia.
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The strategy to venture into the BRICs is vindicated by the statistics. For example, statistics show that the BRIC countries total world economic output rose from 16 to 22% from the year 2000 to 2008. Notably China has witnessed the largest economic growth compared to the other four BRIC countries, accounting for more than half of these countries share. Further China realised more than 15% of growth globally in terms of economic output from 2000 to 2008 Global Sherpa (2013). It is also a fact that middle class of the BRICs shall grow rapidly in terms of consumption. This will spur the economic development of the BRICs further and contribute to the expansion of the global economy. China and India shall be leading in this growth. It is forecasted that the middle class population of the BRICs shall more than double that of developed G7 countries (see figure 4) Global Sherpa (2013).
Figure 4: The expanding middle class of the BRICs
Source: Extracted from Global Sherpa (2013) 5.2.2 Marketing and strategy development After the preceding discussion, two points emerge:
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1)
Marketing the non-PND category - It is expected that some segments which are currently doing poorly in North America and Europe such as the PNG market may initially perform well in new markets. With aggressive marketing, TomTom’s hardware products (PNDs) shall be well received by enthusiastic consumers. However, this may not last long. It is expected that consumers here shall quickly prefer to use Smartphones for navigation. This therefore represents short-term gains. Long term gains shall be made by marketing non-PND category aggressively, that is, the Automotive, Licensing, and Business Solutions segments.
2)
Strategy development - there are two methods where TomTom can enter the markets. The first is by mergers and acquisitions and the second by forming alliances. Mergers or acquisitions are undesirable at this stage due to the financial implications involved at this stage. The best of option is the formation of alliances for which joint ventures are suitable. For instance, the company can seek to work with companies such as Hyundai of Korea for navigational devices, Tata trucks of India, and even Toyota of Japan for inbuilt navigation devices. The same applies for other business segments.
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6.0 References Global Sherpa (2013). BRIC Countries – Background, Latest News, Statistics and Original Articles. Retrieved October, 30, from http://www.globalsherpa.org/bric-countries-brics Hill, C.W. & Jones, G. R. (2010). Strategic Management: An Integrated Approach, (10th ed.). Mason, OH: Cengage Learning. Hillary, R (2004). Environmental Management Systems and the Smaller Enterprise. Journal of Cleaner Production, 12, 561-569. Hoffman, A.N. (2010). Case Study - TomTom: New Competition Everywhere. Amsterdam: Rotterdam School of Management, Erasmus University. http://files.shareholder.com/downloads/TOMTOM/0x0x545490/bca3480b-a97f-4a08-a708eadd800ec62e/Green_statement.pdf Inoue, Y., & Lee. S. (2011). Effects of different dimensions of corporate social responsibility on corporate financial performance in tourism-related industries. Tourism Management, vol. 32, no. 4, pp. 790-804.
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Johnson, G., Scholes, K., & Whittington, R. (Eds.). (2008). Exploring Corporate Strategy: Text and Cases. Sussex: Pearson Education. Regester, M., & Larkin, J. (2008). Risk issues and crisis management in public relations: a casebook of best practice (4th ed.). Philadelphia, PA: Kogan Page. Streeter, S., & Hungerford, T. L. (2010). Cap and Trade: The Kyoto Protocol, Greenhouse Gas (Ghg) Emissions, Carbon.... New York, NY: The capital net. TomTom (2013b). TomTom’s Green Statement. Retrieved October, 30, from TomTom.
(2010).Annual
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http://ar2010.tomtom.com/mission_vision_and_strategy.html TomTom. (2012).Annual Report. Retrieved October, 30, from www.tomtom.com. TomTom.
(2013).Company
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Retrieved
http://corporate.tomtom.com/overview.cfm
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October,
30,
from
7.0 Appendices Appendix 1
Source: Extracted from TomTom (2012)
Source: Extracted from TomTom (2010)
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Appendix 2
Source: Extracted from Hoffman (2010)
Appendix 3
Source: Extracted from TomTom (2012)
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