Vizio is a relatively nascent player in the flat panel television industry. It has witnessed tremendous growth within the industry and, in turn, has seen sales multiply by approximately more than ten-fold within a three year span. This analysis will examine the flat panel industry’s competitive landscape, the success of Vizio’s strategy, and whether Vizio’s strategy is sustainable for the long term prospects of the company.
To get a better understanding of the flat panel television industry, let’s consider the competitive forces. When we consider buyers, there are two groups to keep in mind – the retailers (Walmart, Best Buy, etc.) and the consumers. As it stands today, there is not much price elasticity for consumers. They tend to purchase based on brand recognition. Televisions tend to be a fairly significant investment for the average household and quality, especially with the introduction of high definition, seems to be of paramount importance. Hence, companies that have developed a strong reputation for quality have historically done well. With that being said, flat panel televisions are becoming more popular and the industry continues to grow. In terms of channels, consumers are starting to buy more televisions from large discount retailers, which allows some smaller producers to be appeal to a more price conscious customer base.
Suppliers comprise of companies that sell components and manufacturers that assemble these components. The article suggests that suppliers have been losing power as components have started to become commoditized. However, strategic partnerships between component suppliers and television producers are limiting the supply of key inputs, shifting more power into the hands of suppliers.
Although there is significant growth in the flat panel television industry, there are two large incumbents, Sony and Samsung, that look to maintain dominance in this space. Vizio is a fraction of the size of these two juggernauts and does not have their in-house capabilities in terms of manufacturing and R&D. However, these two brands command a premium price for their products and are not fully optimizing the low-cost retailer channels for distribution (e.g. Costco). Utilizing these alternative channels and targeting a down-scale customer base lowers the potential competitive retaliation from these incumbents.
Initially, Samsung and Sony invested heavily in R&D and manufacturing to create high barriers to entry. However, the commoditization of some of component parts has allowed smaller players like Vizio to enter the market and thrive through partnership with manufacturers. Although there has been some new entrants following the same model as Vizio, barriers to entry still remain fairly high as success is largely determined by strong relationships with suppliers and distributors.
In terms of substitutes, older television models are becoming outdated and the flat panel industry continues to grow. Currently there are no major substitutes that pose a serious threat. However, television quality will continue to improve and older models will become antiquated and a focus on R&D will become increasingly important.
Considering the aforementioned competitive forces in the flat panel industry, Vizio opted to enter as a low cost provider instead of differentiating itself through better quality. CEO William Wang saw an opportunity to capitalize on the recent computer trend, which was moving toward flat screens to buy components in bulk and produce televisions at a low cost. To further reduce cost, Vizio partnered with one of its suppliers, AmTran, by making them a partner with a 23% stake in the company.
With respect to Vizio’s value chain, design, marketing and distribution were all managed by Vizio while manufacturing was managed by a third party, AmTran. Instead of manufacturing in-house like Sony and Samsung, Vizio decided to allow a contract manufacturer to assemble its televisions. Outsourcing manufacturing enabled Vizio to focus on design and marketing, while leveraging a specialized contract manufacturer’s core competency.
The trade-off of being the low cost provider was limiting investments in R&D. Vizio’s strategy was based off the premise that it could maintain quality that was close enough to that of Samsung and Sony but offer at a significantly lower price. Too much of a compromise in quality could potentially deter even the most price conscious customers.
Another important strategic decision was to use distribution channels that were not the main source of revenue for the large incumbents. Vizio established relationships with big discount retailers such as Costco and Sam’s, focusing on a more price conscious consumer. This served as an attempt to attract a different demographic and limit competitive response from Sony and Samsung.
Probably the most important part of Vizio’s strategy was its corporate arrangement with AmTran. The partnership gave AmTran a 23% stake in Vizio and allowed both organizations to benefit from a symbiotic relationship. AmTran rebounded from its loss in 2005 and Vizio to ramp up production, introduce new models and ultimately see huge growth in subsequent years.
To understand the logic behind this agreement, one must consider the better-off test, which determines if there is value added from this alliance. The flat panel industry was very attractive in the sense that it was growing and there was an opportunity to enter as a low cost provider. There were no negative impacts to willingness to pay since consumers don’t have much visibility into manufacturer relationship dynamics. Costs were reduced overall by the preferential treatment which incentivized AmTran to share some of Vizio’s cost and prioritize delivery and component procurement for Vizio.
From a best alternative assessment, the Vizio-AmTran partnership seems to be an effective partnership. Each organization is allowed to focus on its core competencies and minimize the cost of integration, potentially competing goals, and opportunistic behavior. Another potential reason why this partnership thrives is the relationship of the CEOs which would suggest that there is some level of alignment in terms of unified goals without sacrificing individual organizational objectives. For example, AmTran also servers some of Vizio’s competitors.
Vizio’s competitive advantage stems from its ability to keep costs low relative to its competitors. Vizio’s added value is effectively determined by its ability to continue to cut costs as willingness to pay will naturally be lower than the big brands. In addition, the increased number of televisions that are being purchased in discount retail stores are driving prices down, which in turn, is lowering consumer’s willingness to pay.
The partnership with AmTran was very effective in driving costs down and maintaining a healthy supplier relationship. However, as new suppliers have started to emulate this supplier-producer relationship, Vizio’s strategy is being called into question. There are challenges in addressing the future demand of LCDs as some of the large component suppliers hoard components for their own partnerships. Moreover, expansion into plasma televisions becomes difficult without the current capabilities in place. Vizio’s early success was largely due to the fact that AmTran was already a prominent player in LCD manufacturing. There is a challenge of ramping up manufacturing to expand its product line to include plasma panels while minimizing the inevitable cost increases and protecting its margins.
As Vizio looks onwards it needs to determine the best way to stay competitive. One approach was a brand boosting campaign through a deal with an NFL player. This attempt to become a household brand could potentially increase awareness and, in turn, sales volume. Sporting events tend to have the highest viewership, so it seems like a savvy strategy to target this audience. However, sports viewers tend to care more about high definition and are likely to value quality which would suggest a higher willingness to pay than other customer segments. This contradicts Vizio’s strategy as being the low-cost provider and would require Vizio to compete with the high quality providers. This may be received as another potential encroachment on Samsung/Sony’s upscale customer base and trigger a competitive response. This is overall a bad strategy and could potentially do more harm than good.
Vizio is also attempting to expand into plasma TVs and Blu-ray DVD players. The two main things to consider when determining if this is a viable strategy are Vizio’s resources and capabilities. In terms of resources, the Vizio brand is known in the TV industry and will translate well for a plasma model. From a capabilities perspective, Vizio can leverage its manufacturing relationship with AmTran to substitute LCDs for plasma panels, granted the demand is similar to that of LCDs. It also has the relationship with distributors to get shelf space for these TVs. Considering the same formula for Blu-ray DVD players, on the other hand, does not seem so favorable. This would require Vizio to start manufacturing its own goods which is not one of its core competencies and also extend its brand into a new product. Although Blu-ray DVD players are a complementary product, there is not much information available on demand and if it is a big enough market to justify the investment. Hence, Vizio should move forward with plasma TVs and not Blu-ray DVD players.
Ultimately, Vizio’s strategy of being a low cost provider through its manufacturing partnership has resulted in its early success. However, there are challenges that lie ahead as prices in the industry are consistently dropping with the increasing power of retailers. To remain competitive Vizio should remain consistent with its initial low cost strategy and look to create new partnerships/alliances with suppliers and distributors to continue to cut costs. It should be weary of expanding too fast to compete with large players like Sony and Samsung who clearly have an advantage in terms of R&D and scale. Timely growth while maintaining its low cost position will be the formula for Vizio’s success.