Garmin Case Solution

Garmin Case
MGMT 223 Business Policy Tamas Sandor JAKAB February 22, 2014
1. Why, historically, has the PND industry been so profitable? 2. What challenges / changes are likely to influence the PND industry? What do these trends imply for the evolution of the industry? 3. Can Garmin, TomTom and other established players sustain their market positions and margins in years to come? What will you recommend to Dr. Min Kao, Garmins CEO? Word count: Question 1 We will examine industry profitability utilizing Porters five forces model, highlighting the most important reasons underlying the remarkable results Garmin was able to deliver during the second half of the 2000s. Question 2 Undoubtedly, the PND industry is facing serious challenges at the end of the 2000s, coming from various sources. In order to put them into a framework, we will apply Porters model and consider the effects accordingly. From the point of view of the analysis, two major developments occurred. First, technological development created new substitutes for PNCs: smartphones equipped with broadband internet access and running applications such as Google Maps, often preinstalled on the phones. Considering the pricing of them, they mostly appealed for low-end customers. Appendix 1 shows comparative data for smartphones and Garmin PNCs. As it is evident from the table, smartphones were viable alternatives at the time of the case, and they become even more so with the quick development. However, the pressure from smartphones is significantly lower on the high end of the Garmin offer; the professional nvi 775T offers a lot more, but for a price of $449.99. Second, as Porter predicts, the PND industry has matured by 2009. Prices decreased significantly: average retail value per PND unit fell from $529 to $246 (a drop of 53.5%)
during the years from 2004 to 20091, while worldwide sales increased from 3 229 million to 9 477 million.2 Consequently, higher sales did not result in higher profitability, which indicates a maturing industry. These two trends indicate that the industry is going to shift from differentiation to competition in terms of prices. In accordance with Porter, we should evaluate whether it is inevitable. We believe that this is partly true, but due to the threat of smartphones, the full picture is not that simple. Further analysis can be found below. Question 3 We predict that the changing industry structure will deteriorate the margins of the traditional PND industry players, because the technological development will take away a significant amount of their low-end market share, while at the same time it will also decrease their significance in the higher-end products. Smartphones are a significant threat on the low end, while integrated navigation in cars will pressure the high end. The $9.5 billion sales volume at the end of 2009 was a peak, and the trend for PNDs is downward in the future. We believe that this trend is clear and also inevitable, so the incumbents should react in a very consistent matter. We suggest that Garmin, as it did before, focus on acquisitions and try to eliminate rivals as much as possible, thus increasing its share of the decreasing pie. At the same time, it should keep its focus on segments that are not threatened as much by smartphones, such as fitness product lines. Also, Dr. Kao should invest into developing Garmins presence in specialized markets, such as aviation and maritime (which accounts for 15% of Garmins sales)3, where smartphones do not constitute a high threat, utilizing its operating efficiencies referred to earlier. Lastly, we see opportunity for Garmin in building partnerships with car manufacturers and other OEMs and work with them closely to develop better solutions for the built-in segment.
1 2
Appendix 2. (529-246)/529 = 0.5349 Source: Case Exhibit 7. 3 Source: Case p. 5.
Appendix
Appendix 1: Comparative data on PNDs and smartphones4
Garmin PND model nvi 205 nvi 1250 nvi 1350T Price $119,99 $149,99 $199,99 Comparable smartphone HTC Touch Diamond Blackberry Storm Apple iPhone 3GS Price $99,99 $149,99 $199,99
Appendix 2: Average retail value per PND unit (Source: Case Exhibit 8.)
2009 World USA $246 $124
2008 $313 $244
2007 $368 $273
2006 $448 $433
2005 $515 $494
2004 $529 $475
Assuming contracts for two years, with major wireless operators, such as Verizon and AT&T. Data from 2009. Source: http://bgr.com/2009/06/29/comparing-apples-to-apples-two-year-smartphone-cost-examined/ and http://techcrunch.com/2009/08/03/verizon-wireless-slashes-most-smartphone-prices-to-99/

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Appendix 2. (529-246)/529 = 0.5349 Source: Case Exhibit 7. 3 Source: Case p. 5.

2009 World USA $246 $124

2008 $313 $244

2007 $368 $273

2006 $448 $433

2005 $515 $494

2004 $529 $475

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