Excerpt
Table of Contents
I. Executive Summary
III. Table of Abbreviations
IV. Table of Figures
1. Introduction
2. Problem definition and objectives
3. Micro Environment (Porter’s 5 Forces)
3.1 Rivalry among existing competitors
3.2 Bargaining power of suppliers
3.3 Bargaining power of buyers
3.4 Threat of new entrants
3.5 Threat of substitutes
4. Macro Environment
4.1 Political
4.2 Economic
4.3 Social
4.4 Technological
4.5 Environmental
4.6 Legal
5. Main competitive advantage
6. Internal Analysis
6.1 Strengths
6.2 Weaknesses
7. External Analysis
7.1 Opportunities
7.2 Threats
8. International distribution channels
9. Strategy execution
10. Conclusion
13. References
14. Internet References
I. Executive Summary
Even highly successful companies see at some point the need to go beyond, expand their horizons and test if those same products which proved to be successful in their local markets can also do it again far away from home[1] in new, bigger and unknown markets. It is then when companies see themselves confronted with some urgent questions: which markets should I enter into? Which resources (budget, personnel, infrastructure, etc.) should I invest to achieve it? Are my current assets and know-how the right ones to be able to succeed in those new markets? And finally the big final question arises: what strategy should I use?
As the reader will have probably figured out by now, there is no fix answers to those questions and as it often happens in business, the environment, structure of the company, its culture or go-to-market approach will plat a key role in the final results. In this assignment our goal will be the description, discussion and critical analysis of a successful case which, due to the origin of our company and the sector in which it operates, shows how family-owned medium-seized companies can also become industry leaders using global strategies based on exactly the same factors which made them successful in their own local market.
III. Table of Abbreviations
illustration not visible in this excerpt
IV. Table of Figures
Figure 1: Integration Responsiveness Grid and Strategy Types
1. Introduction
Sennheiser Electronic GmbH & CO. KG. is a medium-sized family-owned company managed by the 3rd Sennheiser generation[2] and based in Wedemark (Lower Saxony) with a long tradition manufacturing high quality Hi-Fi audio systems since 1945[3]. Its products include headphones; external, internal, earbuds/in ear, for sport and running, for DJ studios; as well as wireless home entertainment systems, and noise/sound canceling devices[4] for which it has achieved a prominent status for professional sound quality[5]. In 2015 the company had a total of 2.750[6] employees worldwide and a total of 682,2 Mio. €[7] in revenues obtained in:
- Americas, 179,8 Mio.€[8]. (approx. 26%)
- APAC, 147,2 Mio.€[9]. (approx. 22%)
- EMEA, 355,2 Mio.€[10]. (approx. 52%)
Although Europe continues to be Sennheiser’s main market, the Americas and APAC regions have gained momentum during the last years and show currently bigger growth rates[11] than more mature markets. Especially countries like India, China, or South Korea have increased their weight among the company’s global turnover in recent years[12].
Sennheiser’s operations are structured over 3 main production sites in Wedemark, (microphones, audio headsets, wireless communication systems), Tullamore, Ireland (audio headsets, desktop audio systems) and Albuquerque, USA (wireless audio systems)[13]. Innovation plays a crucial role for Sennheiser to keep its leading position in the audio sector. For that, 7% of the total annual turnover is reinvested in R&D activities[14].
2. Problem definition and objectives
In this assignment we will focus our analysis on Sennheiser’s international corporate activities and distribution channels, which should allow us to understand the keys to the success of their current international sales strategy. For that we will take as basis their current business model in Germany due to the fact that it is still mainly from Germany from where the company is managed. That Sennheiser has a well-established brand in all major music and digital markets is a fact[15]. However it is our objective to understand what has made their sales strategy so successful. The below question will therefore motivate this work.
Is Sennheiser using elsewhere exactly the same sales strategies, which have made the company successful in its native market(s) or is it doing something different to adapt its product to the distinctive particularities of foreign markets?
3. Micro Environment (Porter’s 5 Forces)
Porter’s five forces theory is a framework based on five key factors, or “forces”, which determine the level of competition in a given industry[16]. This analysis will help us understand the major forces impacting Sennheiser’s products when being sold at international level.
3.1 Rivalry among existing competitors
Competitiveness is what characterizes the current global audio market, especially in the last 5 years in which headphones have become a fashion accessory and their customization options have even eclipsed the audio quality[17]. Big international brands such as Sony, Philips, Adidas, JVC, Panasonic, Pioneer, etc. coexist in the market with traditional premium brands venerated by audiophiles like Bose, Bang & Olufsen, Audio-Technica, Bowers & Wilkins or Harman Kardon[18], all of them competing globally to increase their market share. But also young and dynamic brands like Beats (recently bought by Apple[19] ), Monster, Sol Republic, etc. have recently entered into the same premium segment. As a consequence, the audio market is in these moments saturated, which benefits customers, allowing them to find an option for every pocket, fashion tastes or sound preferences.
3.2 Bargaining power of suppliers
It is the risk that suppliers threaten companies with increasing prices for the goods they produce[20]. In the audio industry, sub-suppliers are mostly located in (south-)Eastern Asia due to their lower manufacturing costs and produce either as OEM or OBM [21] all types of audio systems. The fact that they are just labor force means that they can be easily substituted by another manufacturer. Apart from that, most of the bigger brands in the audio industry are international corporations with large sourcing networks which enable them to dictate the business conditions to their supplier, in a similar way as Apple does with its iPhone suppliers [22] .
3.3 Bargaining power of buyers
Buyers are these days more demanding than ever before. New technologies offer the customer the opportunity to immediately compare price and features of any product available worldwide and order it even from far away manufacturers. And with a myriad of brands, colors, features, prices or sound nuances to choose from[23], their ability to independently select from a huge range of headphones put more pressure[24] than ever before on manufacturers. Moreover specialized sound magazines (like Ear-In in Germany), the media, or the internet (websites like Wired.Headphones, Headphone.com, in GermanyAudiophil-Online.de,or TestSieger.de,etc.) ensure that the buyer always knows, not only which strengths each headset has, but also previous experiences from earlier buyers having used the same device before.
3.4 Threat of new entrants
New entrants bring the desire to gain market share, and often substantial resources for it[25]. Today there is no need to invest large financial resources in advertising or R&D to offer globally a new pair of headphones[26]. Internet and social media have allowed relatively unknown manufacturers to adapt their offering to those segments insufficiently served by the well-established international brands. Since those barriers to entry the audio market range from low to moderate, the risk of having to deal with unexpected new competitors, especially in their respective local markets, will force a sales strategy right from its conception to take this risk into account. Brands like Beats, Monster or Soul Republic are evidence of this.
3.5 Threat of substitutes
Any digital or analogic device able to deliver high-quality sound could be a potential substitute for a pair of headphones. Additionally Sennheiser is offering a wide portfolio of products which, in some cases, are complementary or could eventually substitute those headphones. Wireless home entertainment systems, Hi-Fi systems, DJ mixing units, noise/sound canceling devices, microphones…[27]. The idea is to offer the customer everything around the high-definition professional sound trying to capture customers with very wide music-listening tastes. So it can be altogether said that headphones are a product with many direct substitutes when it comes to playing music. Its main competitive advantage would however remain in the on-the-go availability .
4. Macro Environment
Markets over the world have experienced in recent years many significant changes, which have led many companies across all industries to pay attention to new sales and sourcing markets[28]. Today companies, even the ones regionally focused which do not export any products, have to integrate in a global environment[29]. The PESTEL strategic ool is a portrayal of information about external factors impacting on a specific business at an international level[30]:
4.1 Political
Political instability is the enemy of international business. Businesses operate according to forecasts and future scenarios based on certainties[31]. Political certainty, democracy and respect for individual rights are some of the values which have to be granted to allow customers to freely make their buying decisions. Unfortunately some of the new developing economies in which Sennheiser has more growth potential[32] are among the most instable on the earth, like India[33], the rest of South-Eastern Asia or Africa; while some highly developed countries like Western Europe, US, Japan, etc., show much lower growth rate and are much more saturated.
4.2 Economic
Closely related to the political situation of any international market is its economic forecast and perspectives. As analysts predict that millions of people will join the middle-class in developing countries within the next years[34], global companies focus their efforts in trying to attract these new consumers who will demand the same levels of quality and service as their peers in developed countries. Sennheiser is not alien to this trend and has designed an expansive corporate strategy aimed at increasing its presence in key developing countries like the Asia-Pacific Region and Africa[35].
4.3 Social
Social trends or consumer habits have a direct impact on the P/L sheet of any company manufacturing mass consumption goods[36]. Digital, fashion, behavioral or cultural trends exercise an important influence on customer preferences. Sennheiser has understood it and has available a wide range of headphones aimed at satisfying not only the customer sound needs but also its fashion or ergonomics taste. Apart from it, the company shows in its website its social engagement through its Code of Ethics and its compromise with the fair trade initiative[37].
4.4 Technological
Technology plays a crucial role for a company like Sennheiser which has been pioneer in the implementation of many innovative audio technologies. From the first wireless microphone to the first "open" headphones, Sennheiser’s innovation has had a significant impact on the evolution of audio technology[38]. With one of the biggest R&D investments of the industry (over 7% of its yearly turnover[39] ), Sennheiser understands that only by keeping track of technology innovation, will the company manage to maintain its competitive advantage.
4.5 Environmental
Worldwide environmental awareness has risen substantially over the years making environmental concerns turn into purchasing drivers for many customers[40]. It applies especially to industrial manufacturing and how the end product has been produced. Sennheiser has understood it and has available a whole section in its international website explaining all the measures the company has implemented in its manufacturing processes to reduce any damage to the environment[41].
4.6 Legal
While markets like the EU or the US are highly regulated (e.g. the new EC Directive on the minimum health and safety requirements […] L equ, 8h = 80 dB(A)) [42] , some others have no restrictions to be respected in the field of sound and music devices. It seems clear then that there is a need to comply with any regulation concerning sound volume restriction, which could be marketed as an additional advantage in countries where regulation is non-existing but where sensitive customers would welcome it.
5. Main competitive advantage
It has been empirically proved that the country of origin of any brand matters to its potential customers[43] and that among those made in Germany is perceived by customers as related to values such as reliability, precision and punctuality[44].
Sennheiser’s homepage explains that the company “stands for premium products, the ultimate in sound quality and undistorted listening enjoyment”[45]. Their USP is headphones and audio systems with impressive sound quality and superior bass response[46], engineered in Germany with a premium design and made of premium materials. Its “made in Germany” know-how based on a long manufacturing tradition differentiates the brand from other high-end manufacturers, and its wide portfolio ensures that all customers find the headphones that fit their style, personal sound taste and ergonomic needs.
6. Internal Analysis
6.1 Strengths
One of Sennheiser’s main strengths, especially when compared to its competitors, is its more reduced size. This allows the company to adapt to the international changing environment in a more flexible way than a big multinational enterprise would do. Additionally, by distributing its products through independent international sales distributors and resellers, the company maximizes its geographical coverage while minimizing the financial investment (fix costs). At the same time a very powerful brand name and a strong competitive position in the most mature technology markets, including Germany and the EU, allow the company to minimize the risk through a geographical diversification of the markets in which it is present.
6.2 Weaknesses
Its size does not only bring advantages for Sennheiser but also an important weakness. If any internationalization process requires strong cash-flows and financial muscle[47], it is obvious that smaller companies like Sennheiser do not have it available in the same quantity as some other multinationals like Apple, Sony, or Samsung do. Apart from that, and unlike its more diversified competitors, its reduced product portfolio focused on audio devices and systems does not help to minimize risks in case the audio market suddenly collapses, slows down or is disrupted by any competitor or new technology.
7. External Analysis
7.1 Opportunities
The current trend towards digital devices (smartphones and tablets) and their increasing customization[48] represents for Sennheiser a big opportunity because mobile digital users often use headphones along with their smartphones to listen to music everywhere. Moreover, the increasing global digitalization and the incorporation to the middle class of hundreds of millions of people[49] in countries like India, Brazil, Mexico, or Turkey -expected to contribute approximately 45 percent of global GDP growth in the coming decade[50] - will offer an untapped source of incomparable growth.
7.2 Threats
Economic instability in Asia (its fastest growing market[51] ), fuel price oscillation which can generate economic crisis, unexpected financial downturns which prevent customers from investing in non-essential goods, or simply unexpected currency, or tax oscillations in the foreign currency, represent threats for which neither Sennheiser nor any other company can be prepared beforehand.
8. International distribution channels
That a relatively small company like Sennheiser has succeeded in placing its products in all major markets is a big achievement. To manage it Sennheiser relies since the introduction in 2013 of its new distribution strategy[52], on a dense network of distributors and resellers carefully accredited as Sennheiser authorized partners[53] that make sure products are brought to the final customer respecting the same buying experience worldwide. According to Gerhard Tammen, Vice-President Sales EMEA, Sennheiser ensures that distribution standards are the same all over Europe and that customers receive everywhere the quality of service they expect from Sennheiser“[54]. This confirms that Sennheiser’s distribution strategy puts its focus in transferring its premium experience –unaltered- to any new market the company is penetrating.
This network of sales partners and resellers has to be supplied reliably in a global market with seasonal peaks and big volume fluctuations. For that Sennheiser relies on a close partner that manages its global logistic operations worldwide with more than 16 million products delivered every year[55]. It is the company Arvato which initially took care of Sennheiser’s global distribution for the EMEA Region but extended later on its span to North and South American, and Asia[56]. Based on three three distribution centers in different continents, Arvato’s operations ensure streamlined processes and maximum control of global inventories[57].
9. Strategy execution
In order to increase market share, companies try to maintain and expand its customer base through finer segmentation. Their objective is to accommodate as many customer preferences as possible[58]. Sennheiser took exactly this very decision years ago. In the past Sennheiser’s products were aimed at audiophiles and they did not look beautiful. Later on the company learned to make them also look beautiful to appeal to the customers’ senses”[59]. It is a repositioning strategy in an attempt to appeal to all types of mass consumers while still being able to attract audiophiles. With it the company made a segmentation based on different product lines for audio professionals: DJs, musicians, etc. and for the average audio customer.
According to McKinsey, the most appropriate strategy to enter a new market depends on the characteristics of the local market and on the company’s size, position, and aspirations in it[60]. Therefore Sennheiser’s decision to sell internationally and the strategy to manage it was a milestone in its corporate history. Therefore the question for SMEs willing to gain access to new foreign markets was what strategy to use. Companies wishing to operate internationally have to find a balance between the pressure towards global integration and local responsiveness and flexibility[61]. The globalization of economy has pushed internationalization not as an option but as a “must”. As costs play the biggest role in the international strategy of SME, they really need to think carefully how to best leverage their financial resources[62]. In the case of Sennheiser, its size did not allow it to have an owned multinational sales structure and that is why the company decided to establish close partnerships, e.g. Arvato, or local distributors and resellers that placed Sennheiser’s products where the company’s own resources could not possibly reach.
Choosing one from the portfolio of international strategies (see Figure 1) is always a very critical decision. In the case of Sennheiser, their typology of product and the composition of digital and electronic markets has allowed the company to deliver its products internationally following a global sales strategy. A global strategy is the way a company defines its long-term objectives and selects its value proposition for the world market; while at the same time coordinates and integrates its business system to maintain a global competitive advantage[63]. Apart from it, in rapidly developing countries, like the ones Sennheiser wants to sell to in the future, the country-level strategy fails to efficiently react to fast growth[64]. But Sennheiser’s main advantage comes from the global industry in which it competes, and from the fact that its position and competitive advantage in one market significantly supports its competitive position in other local markets[65].
Figure 1. Integration Responsiveness Grid and Strategy Types[66] (own representation).
illustration not visible in this excerpt
Sennheiser’s products are sold worldwide unaltered with limited local customizations like translations to local languages in the packaging and instructions manual just to avoid that local customers would be handicapped when using the products. And if we pay attention to the digital market and its trends over the last decades, it seems obvious that consumers worldwide accept standardized products from international companies (e.g. Apple, HP, Microsoft, Facebook or Google[67] ). A global sales strategy leverages standardization and the potential of scale economies arising from the big quantities to be sourced[68].
10. Conclusion
Although the company has been during decades a reference for audiophiles due to its sound quality[69], Sennheiser does not have the financial muscle of some multinationals with whom it competes. Still the German company, far from seeing its reduced size as a handicap, uses it intelligently to be able to react more flexible to the demands of its customers all over the world. One of the main keys to its success has been the capacity to understand what the market demands in every moment. First focusing on portability with the iPad and mp3 revolution and recently being able to quickly understand the fashion trend affecting all digital devices, especially headphones[70].
Sennheiser shows that strategy plays a very important role, especially in the case of SME, to be able to minimize or even overcome the handicap of limited financial and organizational resources when competing internationally with big multinational corporations. We think that with our analysis of Sennheiser’s global strategy some of the facts supporting Sennheiser’s international success have been highlighted and critically discussed. We also believe the global sales structure Sennheiser has managed to create is so strong that it will ensure an international competitive advantage for many years to come.
13. References
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Dälken, F. (2014). Are Porter’s Five Competitive Forces still Applicable? A Critical Examination concerning the Relevance for Today’s Business. University of Twenty, p. 4.
Gereffi, G. (1996). Commodity Chains and Regional Divisions of Labor in East As ia. Journal of Asian Business, 12, 84.
Ghoshal, S. (1987). Global strategy: An organizing framework. Strategic management journal 8.5: 425-440.
Kharas, H. (2010). The emerging middle class in developing countries.
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[...]
[1] Cf. International Business: environments and operations (2007), p. 7.
[2] Cf. Auerbach (2016).
[3] Cf. Sennheiser Homepage (2016).
[4] Cf. Bloomberg (2016).
[5] Cf. Auerbach (2016).
[6] Cf. Sennheiser Homepage (2016).
[7] Cf. Sennheiser Homepage (2016).
[8] Geschäftsbericht 2015. Sennheiser Homepage (2016).
[9] Geschäftsbericht 2015. Sennheiser Homepage (2016).
[10] Geschäftsbericht 2015. Sennheiser Homepage (2016).
[11] Geschäftsbericht 2015. Sennheiser Homepage (2016) p. 11.
[12] Cf. Ming (2016).
[13] Sennheiser Homepage (2016).
[14] Cf. Ming (2016).
[15] Geschäftsbericht 2015. Sennheiser Homepage (2016), p. 11.
[16] Cf. Porter (1979).
[17] Cf. Robson (2016).
[18] Headphonescompared (2016).
[19] Apple (2014).
[20] Cf. Dälken (2014), p. 3.
[21] Cf. Gereffi (1996), p. 84.
[22] Cf. Fortune (2016).
[23] Cf. Johnston (2016).
[24] Cf. BusinessDictionary (2016).
[25] Porter (1979).
[26] Cf. Porter (1979).
[27] Sennheiser Homepage (2016).
[28] Cf. Radebaugh et al. (2015), p. 7.
[29] Cf. Dälken (2014), p. 4.
[30] Cf. Rothaermel (2012), p. 56-61.
[31] Cf. Management Study Guide (n. a.).
[32] Sennheiser Homepage (2016).
[33] Management Study Guide (n. a.).
[34] Cf. Kharas (2010).
[35] Sennheiser Homepage (2016).
[36] Cf. Pérez (1983).
[37] Cf. Sennheiser Homepage (2016).
[38] Cf. Curtis (2015).
[39] Cf. Ming (2016).
[40] Cf. Schlegelmilch et al. (1996).
[41] Sennheiser Homepage (2016).
[42] Directive 2003/10/EC (2003).
[43] Cf. Bilkey and Nes (1982).
[44] Cf. Kühn (1993).
[45] Sennheiser Homepage (2016).
[46] Sennheiser Homepage (2016).
[47] Welch and Reijo (1988).
[48] Cf. Curtis (2015).
[49] Cf. Kharas (2010).
[50] Cf. Atsmon et al. (2011), p. 2.
[51] Sennheiser Homepage (2016).
[52] Wöhe (2013).
[53] Cf. Milligan (2013).
[54] Milligan (2013).
[55] Cf. Arvato Bertelsmann Homepage (2016).
[56] Cf. Arvato Bertelsmann Homepage (2016).
[57] Cf. Arvato Bertelsmann Homepage (2016).
[58] Chan and Mauborgne (2005).
[59] Cf. Curtis (2015).
[60] Cf. Atsmon et al. (2011), p. 4.
[61] Cf. Radebaugh et al. (2015), p. 392.
[62] Onkelinx and Sleuwaegen (2010), p. 2.
[63] Lassere (2012).
[64] Cf. Atsmon et al. (2011), p. 2.
[65] Cf. Ghoshal (1987), p. 425-440.
[66] Radebaugh et al. (2015), p. 396.
[67] Cf. Radebaugh et al. (2015), p. 392.
[68] Cf. Ghoshal (1987), p. 428.
[69] Cf. Auerbach (2016).
[70] Ibid.