Huawei - Strategic Analysis

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1.

Introduction and Company Background

Huawei has rapidly emerged in the eyes of the public as a strong competitor of Apple
and Samsung in the smartphone market and ranked the second with above 20%
market share in Q2 2020, only below Samsung (IDC, 2021). Headquartered in
Shenzhen, Huawei has become a global technology giant with presences in over 170
countries (Huawei, 2021), providing telecommunication equipment and network
infrastructure services. However, as the US has imposed sanctions on Huawei in
2019, restricting Huawei to buy raw materials, including chips which are extremely
important in smartphone production. Therefore, it is necessary for Huawei to re-
evaluate the operating and business environment, both internal and external and
define the strategy options available to reinvigorate future growth.

This report will first critically analyze the external and internal environment of
Huawei, followed by evaluations of the potential strategic options and
recommendations to Huawei on the strategies that build a sustainable competitive
advantage.

Huawei's vision and mission is to "bring digital to every person, home and
organization for a fully connected, intelligent world" (Huawei, 2020). Our proposed
strategic options and recommendations are built around Huawei's vision and mission.
2. External Analysis

Before coming up and evaluating the strategic options, it is necessary to understand


the external operating environment and conduct industry level analysis. The PESTEL
and Porters Five Forces framework are used in this section to facilitate the
identification of the strategic options.

2.1 PESTEL framework

Factor Impact
Political  Sino-US tension has continued in the recent years with signs of
escalation as the US has issued the Executive Orders with
regard to a few Chinese state-owned companies whereas China
retaliated with the announcement of “Rules on Counteracting
Unjustified Extra-territorial Application of Foreign Legislation
and Other Measures”. As a result, businesses operating in
China and the US have to extremely cautious to avoid being
caught in the political tension (Financial Times, 2020).
 Furthermore, the Sino-US tension also causes conservatism and
protectionism of the global business environment, as both
countries tend to protect the local economic interest.
Economic  The economy has been badly hit by the pandemic as restriction
on international travel, lockdown and quarantine measures
remain. GDP growth is either sluggish or negative and
unemployment rate thus stays high (World Bank, 2020). As a
result, people in general tend to reduce unnecessary spending.
 Business and consumer sentiment in general is negative with
the ongoing pandemic and political tension between the China
and the US.
 However, the ultra-low interest rate environment should
encourage consumption.
 Emerging countries, including China, continue to grow faster
than developed countries (World Bank, 2020)
Social-Cultural  The society has become more dependent on digital tools and
the younger generation is labeled as "digital natives". This
generation constantly looks for the latest digital device.
Technological  New functionalities on smartphones continue to develop as
technological advancement continues
 Yet, the smartphone market is relatively saturated
 Heavy investment in R&D across all smartphone producers and
tech company
 5G development may impact the current market\
Environmental  Increasing demand for being more environmentally friendly,
sustainable and even be carbon-neutral
Legal  For smartphone producers and tech companies, protection
patent and copyright law are important to consider
 There is also potential legal concern that personal data recorded
with the mobile device would send to China government,
leading to infringement of personal right (Lu, 2005)
The smartphone industry has enjoyed exponential growth from the technological
advancement in the past decades. This is largely contributed by the younger
generation who becomes more dependent on digital devices and always looks for the
latest technology. Also, the rising consumption power of emerging countries,
particularly China, also facilitated the growth of smartphone industry. However, the
smartphone industry face three major hurdles. Firstly, the ongoing Sino-US political
conflicts have a profound negative impact to Chinese smartphone producers such as
Huawei and Xiaomi etc., given the various restriction imposed by the US government.
For example, the US government issued an executive order to prevent Huawei from
buying Google services and ban Huawei to import US chip technology (Financial
Times, 2020). Secondly, as there is no certainty on when the pandemic will end, the
social restrictions and lockdown have led to higher unemployment and negative
economic growth in many countries, creating a pessimistic consumer sentiment. Last
but not least, given the exponential growth of the smartphone industry in the past
decade, the smartphone market has become saturated with only 3% growth expected
during 2021 to 2025, compared to over 10% growth during 2010 to 2017 (IDC, 2021).

2.2 Porter’s 5 forces framework

Force Impact Competitive


Intensity
Threats of Smartphone industry has high entry barriers as Low
new smartphone manufacturing involves the assembling of
entrants different high precision components such as camera,
battery, display and wireless connector etc. All these
components require advanced technology and complex
manufacturing processes. In addition, it also requires
sophisticated hardware and software with the latest
design and applications in order to attract customers
from existing smartphone producers (Li, 2019).
Therefore, new entrants need to have very strong
technology and R&D capacity which could take years
of investments.
Bargainin Suppliers have strong bargaining power over High
g power of smartphone producers. Although there are many
suppliers suppliers supplying different components and software
of smartphones, only a few suppliers have the state-of-
the-art technology and leading position in providing
smartphone components (Lim, Teo and Yang, 2019).
For example, the OS suppliers are dominated by
Android OS and iOS and the semiconductors and IC
markets are dominated by TSMC (Taiwan
Semiconductor Manufacturing Co., Ltd) and UMC
(United Microelectronics Corporation).
Bargainin Buyers have strong bargaining power over smartphone High
g power of producers as the market is now relatively saturated and
buyers there are many other choices available in the market
with both high-end and low-end smartphone producers.
Rivalry Smartphone producers face strong competition from High
rivalries as there are many players in the market, e.g.
Apple, Samsung, Xiaomi, Google, Oppo etc (Li, 2019).
Substitute Given the functionalities of the smartphone nowadays, Low
the close substitutes are laptops, tablets, digit wearable
devices such as smart watches. However, smartphone
remains the stronger one am substitutes given its ease
and high level o integration. (Li, 2019)

For Huawei, rivalry is considered as the strongest threats given that there are many
players in the smartphone markets. Each players have the unique positioning to
compete. For example, Samsung and Apple emerging players such as Huawei and
Xiaomi who have been gaining market share recently, as well as other niche players
such as Google and Microsoft who have their own OS and Oppo and Vivo who target
the low-end smartphone segment. As a result, buyers have strong bargaining power
given the number of choices they have with smartphone producers. In addition, there
are little suppliers for the operating system and IC that are available for the most
advanced smartphone, leading Huawei to have little bargaining power with suppliers
too. However, Huawei has little true substitutes of smartphones and is protected from
the high entry barriers of smartphone industry.

Given the above external analysis on the PESTEL and Porter’s five forces, the
opportunities and threats can be summarized as below:

Opportunities Threats
 Younger generation continues to  Intense competition from incumbents
look for technology-savvy products  Sino-US conflicts put Huawei in a
 Stronger economic growth in difficult situation on both imports
emerging countries including China and export
support to consumption of  Saturated smartphone market may
smartphone imply slower growth
3. Internal Analysis

After conducting external analysis for Huawei, it is important to also analyze the
internally of Huawei’s own strengths and weaknesses. In this section, we will
leverage on Porter’s value chain, competency to understand Huawei’s competitive
strength. Then we will adopt the VRIO framework analysis to determine the
distinctive competitive advantage of Huawei over its competitors.

3.1 Porter’s value chain model

Firm Infrastructure
 Headquartered in Shenzhen, China
 Extensive presences in over 170 countries
 Strong technology infrastructure
 Unlisted
Human Resources Management
Sup  Approximately 197,000 employees (Huawei, 2021)
por  105,000 R&D employees, over 50% of total workforce (Huawei, 2021)
t  Strong learning and development culture. More than 20,000 employees received
acti certification on training program for all its software development professionals
viti
es Technology Development
 Strong culture of R&D (research and development), e.g. invest US$ 1.5 billion to
drive development of the computing industry (Huawei, 2020)
 R&D expenditure amounted to CNY 142 billion, 16% of the company’s revenue
(Huawei, 2021)
 Held 100,000+ active patients (Huawei, 2021)

Procurement
 Strive to source raw materials from diversified suppliers with diversified
presences to ensure sustained product availability (Huawei, 2021)

Inbound Operations Outbound Marketing and Service


logistics Global logistics sales 5G network
Close operations Built over Regular press providers
partnership with 1,500 conference to Strong digital
between presences networks in pass on first- transformatio
DHL and in over more than hand n partner
Huawei on 170 170 information with global
inbound countries countries and unveil companies
logistics (Huawei, new products Leading
(Huawei, 2021) (Huawei, smartphone
2021) 2020) producer in
Songshan Massive China
Lake Supply advertisement
and Logistics Sponsorship
Center of
Huawei
provides
procurement
logistic
function for
Huawei
(AsiaOne,
2017)

Primary Activities

Porter’s value chain analysis helps to identify the value-added activities by breaking
down and connecting both the primary and support activities (Barber, 2008). From the
analysis above, it is clear that Huawei’s competitive advantage over its competitors is
on its strong focus on technology. Huawei has created an ecosystem of technological
development that helps the company to stay on top of the industry. The ecosystem
started by creating a strong sense of culture on research and development (R&D),
reinforced by a sizeable R&D workforce that amounted to over 50% of Huawei’s total
employees and significant recurrent expenditure invested on R&D for over 15% of the
annual revenue. The culture, the workforce and the investment resulted in over
100,000 active patents of Huawei. The patient then strengthened Huawei’s leading
position across its services including 5G network providers, smartphone producers
and ICT infrastructure providers etc (Kang, 2015). Furthermore, with Huawei’s
extensive global presences, it facilitates Huawei to develop overseas, exporting its
products and technologies globally and become a true multinational corporations.

Resources and Competency Framework

Huawei’s resources an competencies are categorized into threshold and distinctive as


per the table below.

Threshold resources Threshold competencies


1. Large number of Employees 1. Good relationship with the supply
2. Financially profitable and strong in chain
liquidity 2. Good quality smartphone
Distinctive resources Distinctive competencies
1. Global presences and distribution 1. Strong reputation on smartphone and
network 5G communication network
2. Organizational resources - strong R&D 2. Highest standard level of smartphone
team produced at a lower cost
3. Over 100,000 active patents 3. Leading innovation supported by
strong technological resources

The distinctive resources and competencies of Huawei are derived based on primarily
two factors, the globally renowned presences of Huawei, the consistent investment on
R&D which help to reinforce the distinctive advantage.

VRIO framework

Based on the resources and competency framework, then we will adopt the VRIO
framework to evaluate whether Huawei’s distinctive resources and competencies are
valuable, rare, difficult to imitate and capitalized by the organization (Barney and
Hesterly, 2010).

Distinctive Valuable? Rare? Difficult Capitalize by Conclusion


Resources / to imitate? the ?
Competencies organization
?
Resource 1 - Yes Yes No Yes Temporary
Global presences competitive
and distribution advantage
network
Resource 2 - Yes Yes Yes Yes Sustained
Strong R&D team competitive
advantage
Resource 3 - Over Yes Yes Yes Yes Sustained
100,000 active competitive
patents advantage
Competency 1 Yes Yes Yes No Unused
-Strong reputation competitive
on smartphone advantage
and 5G
communication
network
Competency 2 Yes Yes No No Competitive
-Highest standard rivalry
level of
smartphone
produced at a
lower cost
Competency 3 Yes Yes Yes Yes Sustained
-Leading competitive
innovation advantage
supported by
strong
technological
resources

According to Barney (2001), VRIO framework helps to identify different competitive


levels of an organization. The organization only provides sustained competitive
advantage when all four factors are analyzed. However, the organization fails to
capitalize or is easy to imitate then the competitive advantage is either unused or
temporary.

Huawei has a sustained competitive advantage contributed by its extraordinary


Research and Development (R&D) team which has developed over 100,000 active
patents. As patents are legally protected, the patents held by Huawei are rare and hard
to imitate legally, and thus valuable assets. As a result, Huawei can continue to have
the latest innovations that reinforce and strengthens its competitive advantage by
applying it on Huawei’s smartphone.

However, Huawei is not able to capitalize its pioneering 5G communication with its
smartphone (Li, 2019) by bundling the two together for more synergies.

Based on the internal analysis above, the strengths and weaknesses of Huawei’s are
summarized in the table below.

Strengths Weaknesses
 Strong R&D capability and culture of  Unlisted company, i.e. lack of
innovation funding from capital markets
 Over 100,000+ active patents  Unable to generate synergies among
 Global presences and distribution different segments (e.g. smartphone
network and 5G communication)
 Negative news related to China
military and use of information
collected with Huawei’s smartphones
4. Company’s Business Strategy and Business Model

Porter’s Generic Strategies model assesses a firm’s competitive strategy by its


competitive scopes and competitive advantages. Based on Porter’s Generic Strategies
model, there are four types of competitive strategies, namely cost leadership, cost
focus, differentiation and differentiation focus (Tanwar, 2013).

Huawei started its smartphone strategy with cost leadership by offering low-end
phones targeting the low-end mass market, benefiting from the low production cost in
China (Li, 2019). However, as Huawei strengthened its research and development and
becomes the leading technology company in the world, Huawei has adopted a
differentiation strategy, i.e. the “dual-brand and dual-channel” strategy. Under the
dual-brand and dual-channel strategy, Huawei offers high-end smartphones (i.e. the P-
series) with the “Huawei” brand and targets the medium-end market with the “Honor”
brand for the younger generation who are less affordable for the high-end
smartphones, in addition to keeping a small number of the low-end products. This
differentiation strategy allows Huawei to compete at all market segments while
maximizing its competitive advantage.

In the below table, we have mapped Huawei and other competitor’s business
strategies into respective quadrants for illustration.

Competitive advantage
Lower Cost Differentiation
Board Target Cost Leadership Differentiation
- Xiaomi - Huawei, Samsung
Competitive
Narrow Target Cost Focus Differentiation Focus
Scope
- HTC, Oppo, Vivo - Apple, Google and
Microsoft

Huawei’s business model first creates values by offering its high quality smartphones
to different customer groups with different models, i.e. differentiation. Then Huawei
is able to configure its value leveraging its global network and supplies its smartphone
to global customers. Lastly, the value is captured when Huawei is able offer its high
quality smartphone at a cheaper cost than its competitors such as Samsung and Apple.
5. Issues and Challenges, and Strategic Options for Growth

i.) External threats

The biggest challenges for Huawei is the political conflict between China and the
United States. Because of the Sino-US conflict, the U.S. has placed Huawei on the
“Entity List” which refrains Huawei from using any U.S. suppliers or non-U.S.
suppliers providing products that contain the U.S. technology. As a result, Huawei has
faced shortage of key components such as semiconductors, displays, camera lenses
and printed circuit boards (Hosain, 2019). However, these key components are often
the advanced components required for Huawei’s “dual-brand and dual-channel”
strategy. Therefore, a shortage of components is putting Huawei’s smartphone
ambition into a half.

In addition, the intense competition from existing incumbents such as Apple and
Samsung and emerging competitors (e.g. Xiaomi) further worsened the impact of the
U.S. restriction. Huawei is losing its market share and competitive advantage rapidly
from above 20% in the second quarter of 2020 to only 8.6% in the fourth quarter of
2020 while Apple and Xiaomi have quickly taken the market share (IDC, 2021). As a
result, Huawei has to transform its current strategy on smartphone if Huawei cannot
defend its competitive advantages with the U.S. restrictions.

Furthermore, the smartphone market is being saturated after years of extraordinary


growth and the growth rate for the next year is expected at 3.6% per annum only. This
means that it is harder for Huawei to gain back market share under such a low growth
environment.

ii.) Internal Weaknesses

As mentioned in the internal analysis session, Huawei has invested heavily on


research and development in order to build its current leading technology position
from a low-end original equipment manufacturer. However, to support the investment
and to maintain such a large-scale research staff require significant resources. Given
Huawei’s unlisted status and declining revenue due to lower market share in
smartphone industry, Huawei may face capital and funding constraints in the short
term (Huang, 2019).

Furthermore, despite Huawei’s transformation with middle and high-end smartphone


market, Huawei still has a weaker brand image compared to the international
competitors at the global arena, though is the strongest locally. Together with the
numerous negative news as accused by the U.S. government, Huawei’s overseas
business development could be hampered.

iii.) TOWS Matrix

In other to combat with the issues and challenges, TOWS Matrix can be a simple and
effective tool to generate strategic options by addressing the external threats and
internal weakness with the company’s strengths and opportunities (Weihrich, 1982).
The TOWS matrix below summarize the potential strategic options derived from the
aforementioned SWOT framework.
Opportunities: Threats:
 Younger generation  Intense competition
continues to look for from incumbents
technology-savvy  Sino-US conflicts put
products Huawei in a difficult
 Stronger economic situation on both
growth in emerging imports and export
countries including  Saturated smartphone
China support to market may imply
consumption of slower growth
smartphone
Strengths: Option 2 - Strengths-
Option 1 - Strengths-
 Strong R&D Threats strategies:
Opportunities strategies:
capability and culture Leverage its leading
Refocus the resources
of innovation technology and human
from smartphones to other
 Over 100,000+ active capital to develop the own
core businesses such as
patents component, e.g.
telecom equipment, cloud
 Global presences and semiconductor, printed
computing and wireless
distribution network circuit board and display
network infrastructure
etc.
Weaknesses:
 Unlisted company, i.e.
lack of funding from
capital markets Option 3 - Weaknesses-
 Unable to generate Opportunities Strategies:
Option 4 - Weaknesses-
synergies among Transform from
Threats strategies:
different segments differentiation strategy to
Continue to invest in R&D
(e.g. smartphone and cost focus strategy on
and human capital with
5G communication) middle-end smartphone
secured funding source
 Negative news related market targeting emerging
to China military and countries
use of information
collected with
Huawei’s smartphones
6. Evaluate strategic options for growth and implementation

The SFA framework evaluates the strategic options based on Suitability (S),
Feasibility (F) and Acceptability (A). In this section, we will evaluate the four
strategic options in details with the SAF framework.

Option 1 - Refocus on non-Smartphone businesses

Suitability - Except for the smartphone market, Huawei is the leader in cloud
computing, wireless network infrastructure and mobile telecommunication technology
as well. As the demand for 5G network and the use of cloud services have grown
stronger as the pandemic has accelerated the demand for the digital transformation
and technology. Therefore, retreating the smartphone market and refocusing on
Huawei’s other expertise helps to prioritize the limited resources in segments that
Huawei has competitive advantage.

Feasibility - Given that Huawei is already the global leader in providing cloud
computing, wireless network infrastructure and telecommunication technology
solutions, there is no adjustment required by Huawei and it is easily feasible.

Acceptability - However, Huawei may not easily accept this strategic option, given
the years of investment into the smartphone markets and the previous leading position
it has built. This would mean that Huawei has to sacrifice their years of investment
when there is no certainty on when the restriction can be uplifted. Huawei may
speculate on the improved Sino-U.S. relationship with the new U.S. president.

Option 2 - Develop key smartphone components by its own

Suitability - The design and production of smartphone’s key components by Huawei


are suitable given Huawei’s leading position in various technology. Therefore,
Huawei has the strong foundation of technology to develop key smartphone
components.

Feasibility - While it is technologically feasible for Huawei, it will take times for the
investment and the production to come. Therefore, it may not resolve the components
shortage immediately.

Acceptability - Huawei is the leading technology giant with ambitious vision.


Therefore, expanding its segments into smartphone components as part of its
technological empire would make sense and be acceptable for Huawei.

Option 3 - Focus on middle-end smartphone market

Suitability - Huawei can target the middle-end smartphone market with its cost
leadership. With years of experiences under the “dual-brand dual-channel” strategy,
Huawei has established channels and loyal customers in the middle-end segment. So
focusing on middle-end market only is suitable for Huawei.

Feasibility - While Huawei cannot import from the U.S. or any products with U.S.
technology which basically include most of the existing most-advanced smartphone
components, it is hard to stay in the smartphone market. However, middle-end market
would be feasible by sourcing supplies from the Chinese suppliers who are catching
up quickly in terms of the advance level of the smartphone components. Therefore,
with the Chinese components, it is feasible for Huawei to compete in the middle-end
market.

Acceptability - While Huawei’s management may still want to compete directly


international giants like Apple and Samsung, focusing on middle-end smartphone
market is practically the best choice that Huawei should accept as it gets to stay in the
smartphone market and prepares for comeback once the restriction is uplifted.

Option 4 - Continue to invest in R&D and Human Capital with secured funding
source

Suitability - In order for Huawei to continue stay in the global leading position of
technology, continuous investment in the human capital and R&D is required to
reinforce its technology leadership. Therefore, it is a suitable choice for Huawei.

Feasibility - Given Huawei’s declining revenue and thus profitability due to the defeat
in the smartphone market, Huawei may not be able to invest as much resources as it
could before. Therefore, financing will be a concern for Huawei to continue its
aggressive R&D investment.

Acceptability - Huawei has to accept this strategic option if Huawei wants to stay at
the top of the industry. However, it has to make selective R&D investment in
segments that could yield competitive advantage, e.g. in network communication and
cloud computing.

To summarize the above analysis into a scoring system in the SAF framework, a table
to compare each option is prepared to determine the best option whereas score 1-5 is
given for each perspective. 1 is the lowest score and 5 is the highest.

Criteria Option 1 - Option 2 - Option 3 - Option 4 -


Refocus on Develop Focus on Continue to
non- smartphone middle-end invest in R&D
smartphone component by smartphone
business its own market
Suitability 5 4 5 4
Feasibility 4 4 5 3
Acceptability 3 5 4 4
Total 12/15 13/15 14/15 11/15

Based on the overall scores, focusing on the middle-end smartphone market seems to
be the most rational choice for Huawei as Huawei would be able to stay in the
smartphone market and be prepared for a come back to the high-end smartphone
segment once the restriction from the U.S. is improved.. In addition, Huawei can
leverage on the past investments on smartphone market and to monetize from the
previous successes which helped to build a large loyal customer base. However, in
order to success in the middle-end smartphone market, Huawei would first need to
secure the best supplier in the markets as Huawei only has very limited choices as a
consequence from the U.S. sanction. Furthermore, Huawei needs to identify the
appropriate markets for its middle-end smartphone that Huawei can create a
competitive advantage, e.g. Southeast Asia and Eastern Europe.
7. Conclusion

To conclude, Huawei is a globally leading technology giant specializing in


smartphone, 5G network communication and cloud computing segment. However,
with the recent Sino-U.S. conflict, Huawei has been listed in the U.S. “Entity List”
which thus suffered adversely from restrictions to import key components for its high-
end and middle-end smartphones. As a result, Huawei would thus transform its
differentiation strategy into a differentiation focus strategy targeting the middle-end
smartphone following a thorough review of the strategic options, internal and external
and competence analysis. By orienting the resources in the middle-end smartphone,
Huawei would be able to sustain its competitive advantage.

Nevertheless, transformation would never be easy. However, with Huawei’s


experiencing of successfully transforming from production of low-end smartphone for
network providers to be the emerging high-end smartphone players competing with
Apple and Samsung, Huawei has the competences and resources, i.e. its technology
and human capital, to be successful despite the strong headwinds and challenging
environment.
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