Business Strategy on Mobile App Company

Introduction

Netnovation Sdn Bhd is one of the subsidiary companies, which is 100% owned by the publicly listed company Nexgram Holdings Berhad in Malaysia. 

 The company had built up more than 10 years in Malaysia, and was one of the pioneer companies that provide MVAS (Mobile Value Added Service) solution. The business is stable from the previous 10 years, however the revenue sales of the company started dropping 3 years ago, which affected the performance of the company badly. This paper is to find the proper solution, the appropriate strategies choice and options to improve the performance of the company, and make the business sustainable and keep going to growth.

  1. External Analysis 

The company is the leading provider of IT solutions such as VAS (Value added service), Mobile application development and IT consulting. Originally, the company is one of the pioneer companies in the VAS industry that develop mobile entertaining applications and sell mobile contents such as games, pictures, video, music, ePublishing and Lifestyle Content in South East Asia countries such as Malaysia and Indonesia. 

  1. Company’s products

MVAS (Mobile value added service) is a business solution, which provides services beyond standard voice call and can be any service industry with a little or no cost. VAS allows mobile phone users to download various contents with a monthly charge subscription, or charge per content, by receiving SMS messages. MVAS was popular in the previous decades in South East Asia countries such as Malaysia, Thailand and Indonesia, before the birth of smartphones, therefore the company business grew rapidly. However, the business revenue kept drooping in the recent year due to the popular use of smartphones. 

Mobile Apps is the other business of the company other than MVAS. The company started to develop and sell mobile apps in 2014, due to the increasing demand from the market, however mobile apps products are still considered very new business in the company. 

1.2 PESTEL Analysis

PESTEL analysis stands for Political, Economic, Social, and Technological, Environmental and Legal analysis. It’s a framework of macro-environment factor use to study how external elements affect the business, and environmental scanning component of strategic management. (Abhishek Gupta, 2013)

1.2.1 Political

In the recent decades, the Malaysian government has been taking numerous initial steps to improve the IT infrastructure in order for IT industry steady growth in the country.  For example, improve and encourage the IT education in the country and establish national broadband networks across Malaysia. These steps have impacted the local IT industry such as hardware and software’s company, as well as software and mobile application development companies; these are the added advantages for businesses to grow. This also created numerous opportunities for the company to expand, or diversify the mobile and web business.  On the other hand, this also will cause more competitors to enter the market, which will threaten the business.

1.2.2 Environmental

In recent years, everybody is emphasizing on “going green”. Humans are starting to be aware of the importance of doing business with the eco-friendly system. There are opportunities for the company to create some of the products with new technology, which can emphasize on the environmental concern, for example preserving natural resources, replacing the paper mail with sending email in a web system, or paying bills with mobile apps. 

1.2.3 Social

According to the research statistics from Statista.com, there are nearly estimated 11 million smartphone users, and the totals of smartphone users will increase to 13.7 million in 2019 (Statista, 2016). The increase of smartphone users had affected the mobile content business (MVAS), which had already reduced the sales revenue. Conversely, the increase of the smartphone users also creates numerous opportunities for the team to develop new technology to battle the market, such as various types of mobile applications.

Another issue in IT industry Malaysia is the shortage of skilled IT staff in Malaysia to support the growing needs in IT industry, because most of the skilled IT professionals have migrated or moved to other countries, thus hiring the skilled staff is one of the challenges for the management. The shortage of the IT staff may have threaten to the 

1.2.4 Technology

From the technological perspective, most of the technologies, such as software, hardware and other internet services rely on the providers from overseas, in simple word import oriented. The maintaining cost may be a bit higher compared to local service providers, creating a burden to the company. Other than that, the invention of new technology have threaten to the mobile content industry (MVAS), for example, some of the new web and mobile system created, to allow user to download entertainment contents for free, some of the social media or mobile application also allow user sending text and picture message with no charging.  However, the positive side of the advanced technology from overseas helps the development team to come out with some brand new technology products. 

1.2.5 Economy

According to the recently report from Focus Economics, the Consensus panelists have expect the average of the inflation rate will go to 2.6%, and it will rising from 2.6% to 2.7% at year 2017 (Focus Economics, 2016), the impact from the inflation rate is clearly to see when the income of the company have decreased.  On the other hand, the economic downturn also created opportunities for the company to design some mobile apps that can help consumers to save money. 

1.2.6 Legal

There are some legal issues on the mobile application development and mobile content development process such as Confidentiality, Intellectual Property Ownership, Intellectual Property Protection, etc, which have threatened the company. For example, the mobile content such as pictures, video, and sounds that display on the website, may have been misused for reproduction, published or sold to the user.  In such a situation, the company may be facing the infringed Copyright issue and receive infringement claims from the content owners. Therefore, the production team may need to spend time to check for the permission, or make sure the contents have not been licensed, in order to avoid any legal issue. Conversely, the ownership of copyright of the company also being another legal issue, when other company have steal or misused the software or original contents of the company  

  1. Porter’s 5 Forces

Porter’s Five forces model of competitive analysis is an illustration of how the Five competitive forces can be used to explain low profitability and viable entries to an industry (Hill & Jones, 2007).

1.3.1 Competitive rivalry

Some of the web systems created mainly for free content download have beat those company businesses that are required for charging. The new smartphones that have become popular in Malaysia in recent years have threatened the MVAS business that uses SMS to download content.

1.3.2 Threat of the new entry

The numbers of competitors keep increasing, the current market is competing with price and quality of the product. It would be a challenge for the company to find royalty customers. Even though the company is one of the pioneers to MVAS solution provider, there are more competitors joining the battle recently.

1.3.3 Bargaining Power of Suppliers

MVAS solutions depend heavily on the service partner / service provider like Telco companies, which dominate the revenue sharing arrangement in MVAS. The company is getting the lower percentage from the user subscription. For the mobile application business, the power of the supplier is not too strong, because there are numerous suppliers that can provide the same product and service.  

1.3.4 Bargaining Power of Customers

The power of the customers has caused the pricing game in the market, where competitors keep fighting with each other with the price, to attract the customers, and eventually only few competitors are able to survive. 

There are positive and negative outcomes from customer’s request on mobile apps customization, the position outcome is, they may continue to use the service for a longer period, and require maintaining service which enables the company to get a monthly charge.  On the other hand, the disadvantage is that it requires longer time and resources to complete a customized project. 

1.3.5 The threat of substitution

In recent years, mobile phone users are able to download their favorite mobile content from the Internet easily, by using their smartphone for free. Since then, a large number of the MVAS subscribers have unsubscribed the MVAS service. For the Mobile apps product, even though there are numerous mobile apps providers in the market, the company is still able to come out with creative and innovative fresh ideas on new mobile apps. 

1.4 Market Positioning

According to the research report from MMA (Mobile Marketing Association) Malaysia, the major mobile internet users group from 18-24 years old (31%) and 25-35 years old (33%), the minority group are below 18 years old (13%) and above 35 years old (22%) (MMA,2013). The major segmentation on the MVAS is the age group between 18 to 40 years old, majority are male, who willing to spend money to buy mobile contents. The target segmentation for Mobile apps product is the SME companies (small medium enterprise), provide software and mobile application service to the local company.

Financial analysis20152014201320122011
RevenueRM 1,500,000RM 2,000,000RM 3,200,080RM 4,800,000RM 4,500,000
VASMobile apps servicesOther
Profit by product70%20%10%

The financial report showed that the revenue of the business decreased since 2013, from RM4,800,000.00 to RM1,500,000.00 in 2016. The business has decreased about 68% of revenue. The major income of the company is from MVAS business, other products like mobile application service (20%), and other (10%), are not the main income of the business. 

  1. Internal Analysis 

2.1 SWOT

2.1.1 Strength

Netnovation Sdn Bhd has a strong company background, supported by the parent company (Nexgram Holding Berhad), which is established since the year of 2000 and the pioneer in MVAS business that is already stable in mobile SMS and mobile contents industry in the market. The company is able to minimize the cost, because it has no manufacturing cost and logistic cost required. Applying the latest technology on how to develop the software and mobile application. The company is only focused on the growth and R&D of web application development. 

2.1.2 Weaknesses

According to the statistics of the staff’s qualification, 70% of the employees are diploma holders, 25% of the employees are degree holders and only 5% of the employees are graduated from Master degree. Other than that, skill and knowledge training also did not provide help for employee knowledge growth.

The company may face difficulties with the rapid growth of the current mobile technology, which is high cost to maintain the staff’s quality in the company. The company would not easily battle the other competitors, if the employees are not competing in the industry. The company may increase their cost when they get better quality new hires.  

2.1.3 Opportunity 

It’s a new opportunity for the company to join the mobile apps market, beside the MVAS market. The company also may also set the new sales target from the mobile apps business, which may help the company generate more sales revenue and profit. 

2.1.4 Threat

Numerous competitors have tried to enter the market in this industry has threatened the company, also causing the industry to become the red ocean market. The worst scenario may lead to the company battling the sale with lower price eventually, therefore new strategies are vital for the company to survive in the market. 

2.2 Value chain for VAS 

Value Chain theory created by Michael Porter explained how all activities involved in one organization convert the input (material and resources) to the output (products and services) There are two major categories of business activities: primary activities and support activities. Primary activities are directly involved in transforming inputs into outputs and in delivery and after-sales support. The support activities involve the organization to support the primary activities. (IMA,1996) 

2.2.1 Primary activities

Inbound Logistics

For the primary activities analysis on the value chain in MVA, the inbound logistics process can be defined as the content management process including create and gather contents such as games, wallpaper, video, ringtones, ePublishing and Lifestyle Content. 

Operations 

The next activity is the product assembly process. In this stage, the IT development team is required to develop numerous software and programs that allow users to download the content, for example the WAP site or the mobile apps. 

Outbound Logistics

The third stage for MVAS in value chain analysis is the outbound stage, where the phone user makes a subscription to the MVAS service via telco operator with the “Short Code” provided by telecom companies. This stage is to develop a platform that plugs with the telco networks, just like a bridge between aggregator and telco.

Marketing and Sales

In this stage, explain how the user knows about the product, such as by printed advertisement, website banners etc. Some of the Sales and promotion from MVAS rely on the Publisher, which is called the Publisher Centric model. In this model, the infrastructure is managed by the application or content provider. The carrier is simply used as a transport device for that content. (Sangoma.com, 2015) 

Service 

The marketing customer service department will handle the after sale service tasks, in order to reach the customer’s satisfaction.  

2.2.2 Support Activities   

Infrastructure

Some activities such as planning, finance, accounting, quality management, etc. are involved to maintain operation function. There are several departments in the company such as, the IT department (Including 7 programmers and 2 designers), the marketing and customer service department (4 working staffs), account department (2 working staffs).  These departments work together to make sure the organization is functioning well.   

HRM (Human Resource Management) 

Human Resource activities such as employee selection, management development, staff’s promotion and placement, appraisal etc. are important to support other activities to run smoothly. The human resource department required hiring suitable staff to handle the jobs, and conduct appraisal once a year to evaluate the performance of the staff in the company. 

Technological development

Technology development is highly important in the company because the performance and sales of the company is highly relying on the new technology products developed by the company.  New product development relies on the new technologies acquired by the company. The IT departments may need to do the R&D tasks in order to catch up to the latest technologies in the market. 

Procurement

There are many activities involved in the procurement process, such as selecting the right vendors, authorization of Purchase Request and approval of Purchase Request, providing payment to the supplier, etc. 

2.3 Product Analysis 

2.3.1 Product life cycle

Raymond Vernon developed the theory of Product life cycle in 1966, a concept of product life which has gone through few stages, such as phases of introduction, growth, maturity and decline. (Vernon, 1966) Each phase has a particular time period; it can be from several weeks to several decades. The theory has been widely used for economy, marketing, business analysis, and etc.  Since the MVAS product in this company been 20 years in the market for 20 years, it has come to the stage of Decline which started reducing the sale and profit. 

2.4 Financial Ratio analysis of the company 

How good the performance of the company to generate profit can be analyzed in the profitability ratio report, profitability ratios also measure the efficiency in how it deploys assets to generate profit. In 2015, the company generated RM1,500.000 sale revenue, and the cost of sale is RM660,000.

Gross profit margin may tell how good one company is by setting the product price, and control the production costs. The gross profit ratio is 0.56, which means RM1 of the company earns, 0.56 is the gross profit of the company. 

Revenue = RM 1,500,000Cost of Sale = RM 660,000 
Gross Profit =RM 840,000 Net Profit = RM 200,000
Gross Profit Ratio: 0.56Net Profit Ratio = 0.13

The net profit ratio tells how much of the net income for the company makes, basically the higher of the net profit ratio means the company is more efficient to convert the sale into actual profit. Net profit ratio for the company is 0.13, which means every RM1 the company earns, there is 0.13 is the net profit for the company. 

3.0 Strategy choice

Vision and mission 

The strategies proposed have to match the vision and mission of the company. The vision of the company is “Enriching people’s lifestyle by redefining mobility through continuous innovation.” (Nextnation,2015) Therefore the company has to keep continuing to come out with new business models and products when it needs to, in order to achieve the company’s Vision. For the time being, the company has to develop new mobile applications and web system that with creative and innovative ideas to fulfill the market’s need. 

3.1 Ansoff Matrix 

One of the strategy ideas is the company may focus on the Mobile application business, instead of the MVAS service when the revenue keep decreasing from MVAS business. 

According to the research from Yahoo’s Flurry analytics shows that, the mobile user spends 90% of the time on the mobile apps. (Smart Insight, 2015) which also means there is still a huge demand for new fresh ideas on the mobile apps in the market. 

Ansoff Matrix model is one of the alternative options for the company, which seeks for the future growth of the company. There are four growth alternatives, which are Market penetration, Market development, Product development, and diversification. H. Igor Ansoff first introduced his work, the Ansoff Matrix in his article “Strategies for Diversification” in the Harvard Business Review (1957). According to Ansoff, in order to retain the market position, the company should keep continuing change and growth; therefore he suggested this strategy to make the company survive and grow.

3.1.1 Market penetration 

One of the solutions is to make the business grow by using the existing products in the existing market. The company started selling the mobile apps business less than one year ago, therefore the business can still grow by applying the appropriate marketing strategy. In order to attract the existing target customer, the price of the mobile apps should have to be reduced, or give add-on features with no additional price. The company may also need to utilize the in-bound marketing tools like social media, SEO (Search Engine Optimization) to advertise the new price and new promotion, which is suitable for the existing market segmentation such as the small and medium company.  

3.1.2 Market development 

The company should also aim for the new market segmentation to expand its business and generate greater sales revenue. The new target segmentations will be the mass market, such as NGO, young entrepreneur, SME, individual, college student and etc. by providing the Mobile apps builder system for them to create their own mobile apps and only charge from them with affordable monthly subscription fees.  The purpose is to generate greater volume sales from the mass market by low subscription charges. 

3.1.3 Product development

The new product going to aim for the mass market is the Mobile apps builder system. This system is not going to sell, because it’s for revenue generating purposes. The company may need to spend 1 month to create such a system from the current IT team department. The team required a better Mobile apps builder system with better features to compete with the existing competitor such as buildfire.com.   

3.1.4 Diversification  

Diversification is the most risky marketing strategy because the company may be able to face uncountable issues and face unknown circumstances.  Some of the scholars showed that related diversification is more profitable than unrelated diversification.  (Macmillan et al, 2000; Pearson, 1999). 

Diversification is considered high risk for one company, because there are numerous issue and unknown circumstances for the company to diversify. However the related diversification may reduce the risk, and make higher profit.  (Macmillan et al, 2000; Pearson, 1999). 

The diversification idea is the “Mobile advertisement platform”, which may help the company to diversify the business to another realm. Mobile advertising is a new advertising media that displays advertisements to consumers when they use or download mobile applications like mobile games and various mobile apps. Mobile advertisement is an advert, appearing on mobile devices such as smartphones, tablets, iPad etc. There are many forms of advert use as an advertising media such as banners appearing on the phone, web poster, SMS etc.

According to the BI Intelligence research results, the revenue from digital mobile advertising will keep increasing drastically, compared to non-mobile advertising. (Business Insider, 2014) 

In recent years, the mobile advertising business is growing rapidly, because more and more people use smartphones and tablets.  

3.2 Porter’s Generic Strategies 

The company may beat the market by manipulating the pricing and product differentiation strategy. Generic Strategies model developed by Michael Porter and published in his book in 1985, named “Competitive Advantage”. Porter believed that a business can maximize its performance by two main strategies, which is the low cost production and focus on the differentiation of products and services, by a focus of organizational efforts on a given segment of the market. He also concluded that, any business that attempt to combine the low cost and differentiation invariably, will end up “stuck in the middle” (Porter, 1980)

3.3 Bowman’s Strategy Clock

Cliff Bowman and David Faulkner develop Bowman Strategy Clock, an elaboration version of Porter’s Generic Strategies, which also focus on low price and differentiation, but in eight different strategies. There are four strategies to apply for the company at this moment, to compete in the current market place. 

3.3.1 Product positioning

In order to target the different needs from the customer, one suggestion is to position the different kinds of mobile apps. One of the strengths of the mobile apps business is the customization of the different applications and systems with very different prices. The suggestion from Bowman strategy clock, is to focus on the customer’s perceived value and the price of the product. 

3.1.2 Low price and low added value (position 1)

In order to beat the competitor on price, the company may create some mobile application with very basic features, and allow the customer to build their own mobile by just a few clicks and theme selections from the mobile apps builder website, prices on these apps are cheap, which only RM 120 monthly subscriptions fees, and cheaper than some other competitor, such as Buildfire.com. The target segmentations are the individual user, young entrepreneur and the NGO (Non-governmental organization)

3.1.3 Low Price (position 2)

In position 2, Bowman suggested the strategy still focuses on low price, but a slightly better perceived value compared to the position1. Pricing of the mobile apps are adjusted according to the requirement and demands from the customer, which is the customization of mobile apps. However, the price still remains low when compared to the market to attract customers. The strategy on how to make profit is to minimize the cost, such as using the open source code, existing code and free images to build the mobile apps for the customers. Price for mobile apps is about RM20,000 to RM 50,000 for one single app, the completion time should be around one week. The target segmentation is the SME and the entrepreneur with small business. 

3.1.4 Differentiation (position 4)

Differentiation strategy is to compete the market with offering the high-perceived value product, and price also higher. With the customized mobile apps, the company is able to charge higher prices with better quality of the apps. Price range would be a minimum of RM80,000 to over RM200,000 for one customized app. One of the example products is a customized shipping cart.

Some of the scholar researchers criticized that some existing tools are no longer suitable for creating strategies into uncontested market spaces. (Kim & Mauborgne,2005) However, the low cost and differentiation strategies are still the basic way to compete in the market, regardless the niche or general market, price and differentiation are still crucial for one business to succeed. (Portal,2001) 

3.4 Financial Forecast 

Financial forecast for coming 3 years
2016-2017 (Year 1)2017-2018 (Year 2)2018-2019 (Year 3)
Target sale revenue = RM2,000,000Target sale revenue = RM2,500,000Target sale revenue = RM3,000,000
Cost of Sale = RM 860,000Cost of Sale = RM 860,000Cost of Sale = RM 860,000

The Financial forecast on Ansoff Marketing strategy has shown the target sale in the year 2016 to 2017 will be minimum RM2,000,000 and the cost of sale also increased due to the new hiring for the technical staff, which is RM860,000. For year 2017 to 2018 the target sale will increase from RM2,000,000 to RM 2,500,000 and in year 2017 to 2018 the target also increase from RM 2,500 to RM 3,000,000

Compared to the current sale of RM 1,500,000 the target minimum sale from the new mobile apps business is RM 500,000 therefore the company targets to sell about 10 mobile apps within 12 months to reach the target. Other products such as Mobile advertisement may also slowly increase its sales for the coming three years.  For the second year and third year, target mobile apps sold is 20 in 2017-2018, and 30 mobile apps target to be sold is 30.

Target sale revenue 
Mobile Apps = 90% increase Mobile advertisement = 10% growth 

3.5 Human Resource Management Strategy 

According to one of the research on human resource management, finding and selecting employee has significant effect on the improving the effectiveness of staff (Reza Alami & Reza Sohaei, 2015) The HR department should set the criteria of hiring new employee, such as the minimum school qualification, working experience and skills. Therefore other than the pricing strategy, the company also has to know how to monitor and control the staff’s quality. For new employee selection, the human resource department has to select the qualified employee to join the company. 

Skill and knowledge for technical staff are highly important for the company to produce high quality of the products; therefore the company is required to conduct in-house training to the employee. In-house training and knowledge sharing not only can improve the staff’s knowledge and skills, on the other hand, it also helps the company’s employees to build up good relationships. 

6.0 Conclusion 

After 20 years in this industry, the current core business of the company, MVAS has come to the decline stage when smartphones are in popular use for the consumers. New products for the business such as mobile apps and mobile advertisement are other options for the company to produce to sustain its business with the new target sales revenue for the coming 3 years. 

Reference

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