Firsrt Mover in China Telecoms

7/30/2019 Firsrt Mover in China Telecoms

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Un i v e r si t y o f N o t t i n g h a m

Are Fi rs t -Mov er Advan t ages Rea l l y Sus t a inab le?

A Case St ud y o f Fore ign Mob i le Phone

Manu fac tu r e rs i n Ch ina

Yu-Fang Yang

MSc I n t e rna t i ona l Bus iness


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Are Fi rs t -Mover Advant ages Rea l l y

Susta inab le?

A Case St ud y o f For e ign Mobi l e Pho ne

Manuf act u r ers in Ch in a

By

Yu -Fan g Yang

2 0 0 8

A Dissertation presented in part consideration for thedegree of MSc International Business


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A c k n o w l e d g e me n t

Firstly, I would like to thank to my supervisor, Dr. Chengqi Wang, for

his guidance and suggestion in the process of writing my dissertation.

In addition, I wish to appreciate the support of my parents, my

brother and sister, and friends in Taiwan. Finally, I will offer my

heartfelt thanks to my friends in the University of Nottingham for their

encouragement and company during this period.


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Abs t rac t

The answer to whether the first-mover advantage is a source of

sustainable competitive advantage is still debatable. Empirical

studies are widely made in many industries. However, many of them

are made in the United States. In this dissertation, the first-mover

advantages and the resource-based view of a firm are applied jointly

to Chinas mobile phone industry to examine whether the first-mover

advantages are really sustainable.

According the results, it is found that the sustainability of first-mover

advantages depend on many factors. It depends on the resources

pre-empted by the first mover at the initial stage and its ability to

accumulate and develop new resources. In addition, the resources

possessed by the followers are also critical. The resource portfolio of

a firm may change over time, especially when the market is in the

transitional period or becomes more competitive. Pioneers enjoy the

benefits of early entry before the entrance of other rivals. However,

the first-mover advantages may perish over time and late entrants

may surpass the pioneers if they can not develop new resource

portfolio in accordance with the market change.


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Con ten ts

Page

Acknowledgement

Abstract

Contents of Figures and Tables

Chapter 1: Introduction 1

1.1 Background 1

1.2 Aims and Objectives 2

1.3 Research Structure 6

Chapter 2: Literature Review 8

2.1 External Analysis 9

2.1.1 PESTEL Analysis 9

2.1.2 Five Forces Analysis 10

2.2 Internal Analysis 16

2.2.1 Resource-Based View Analysis 17

2.2.2 Resource Portfolio Change 21

2.2.3 First-Mover Advantages 22

2.2.4 The Synergy of FMA and RBV 25

Chapter 3: Methodology 27

3.1 Introduction 27

3.1.1 Quantitative and Qualitative Methods 27

3.1.2 Why Qualitative Method 28

3.2 Research Design 30

3.2.1 Case Study 30

3.2.2 Selection of Case Companies 32

3.3 Sources of Data 35


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3.3.1 Data Collection 35

3.3.2 Limitations 38

Chapter 4: Chinas Mobile Phone Industry 40

4.1 The Macro Environment of China 40

4.2 Chinas Mobile Phone Industry 42

4.2.1 Overall Situation 42

4.2.2 Competition between Local and Foreign Firms 44

4.3 Triggers for Chinas Mobile Phone Industry 46

4.3.1 Economic Development 46

4.3.2 Government Policies 48

4.3.3 Other Factors 51

4.4 Characteristics of Chinas Mobile Phone Industry 52

4.4.1 Highly Technology Concentrated 52

4.4.2 Intensive Competition 53

4.5 Five Forces Analysis of Chinas Mobile Phone Industry 54

4.5.1 Threat of Entry 54

4.5.2 Threat of Rivalry 56

4.5.3 Threat of Substitutes 57

4.5.4 Threat of Supplier 57

4.5.5 Threat of Buyers 58

Chapter 5: Case Studies: Motorola and Samsung 60

5.1 Company Background 60

5.1.1 Motorola, Inc 60

5.1.2 Samsung Electronics 61

5.2 Firm Resources 63

5.2.1 Technology 63


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5.2.2 Brand Reputation 66

5.3 First-Mover: Motorola 69

5.3.1 Discover the Opportunity 69

5.3.2 100 Percent Control in the Chinese Operations 70

5.3.3 Long-term Investment 70

5.3.4 Maintain Guanxi 71

5.4 Follower: Samsung 72

5.4.1 A Business Group 72

5.4.2 Project Execution Ability 73

5.4.3 Vertical Integration 75

5.5 Discussion 77

Chapter 6: Conclusion 83

6.1 Findings and Implications 83

6.2 Contribution of this Study 85

6.3 Limitations and Future Research Direction 86

References 89


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Cont en t s o f Figur es and Tab les

Page

Table 1 Chinas Mobile Phone Market Occupation by Brand in 2005

35

Figure 1 Development of Mobile Phone Market in China,

1995-2006 43

Figure 2 The Proportion of Mobile Phone Subscriber in China,

2000-2007 44

Table 2 Chinas Economic Growth, 1978-2005 48

Table 3 Best Global Brands, 2003-2006 69


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1

Ch a p te r 1 : I n t r o d u c t i o n

1 .1 Backg r ound

As one of the worlds largest emerging markets, China has attracted a

large number of foreign direct investments (FDI). Many multinational

companies increasingly regard China as a strategic market rather

than a production base. Chinas mobile phone industry has flourished

in recent years due to remarkable economic performance and great

social changes. Many multinational mobile phone manufacturers are

drawn in by the very large amount of customers and potential for

economic growth. The flourishing industry has been cultivated by

continuous economic development and promotion by the Chinese

government. After WTO admission in 1999, China took a more open

attitude towards foreign investment. In addition, the deregulation and

reformation of the telecommunications industry facilitated the

development and competition of the mobile phone market as well as

the diffusion of mobile phones.

Motorola entered China in 1987 and dominated the local market in the

early 1990s. Nokia and Ericsson immediately followed and enjoyed

the benefits of Chinas flourishing mobile phone market. Japanese and

Korean companies started participating in this market in the late

1990s (Low, 2005) in spite of uncertainty surrounding government

policies.

As one of the largest mobile phone manufacturing bases in the world,


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China produced 550 million mobile phones in 2007, accounting for

more than half of the worlds production volumes of handsets. Nokia,

Samsung Electronics, Motorola, Sony Ericsson and LG electronics

contribute to about 70 percent of total production in China (Shen,

2008). Many of them have built local manufacturing facilities and R&D

centres in China in order to respond to domestic needs.

The industry structure is undergoing a transition and the level of

competition in this industry is getting higher. Companies have to vary

their strategies with the changing environment. Accordingly, firm

resources are useful as a bargaining counter to compete and survive

in the highly competitive industry. This is in accordance with the

resource-based view which suggests that firm resources represent a

mechanism for competitive advantage (Veliyath and Fitzgerald,

2000).

1 .2 A im s and Ob jec t i ves

Firms competing in an industry have competitive strategies. These

strategies are developed through a planning process in respect to the

environment in which they operate, corresponding to their core

competencies. That is to say, firms apply their specific abilities to

exploit the potential opportunities in the dynamic business

environment. Therefore, it is essential for a firm to figure out its

strengths and explore the opportunities in a market. The core

competence of a firm may help it conceive and implement competitive

strategies. There are two influential frameworks in the literature on


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strategic management, Porters five-forces model and the

resource-based view of the firm. The two frameworks examine the

same issue from different perspectives. Porters framework suggests

that a firms strategy will be affected by the industry structure it works

in, whereas Barneys resource-based view of a firm advises that their

internal resources and capabilities are sources of competitive

advantage. The resource-based view shifts emphasis from external

factors toward internal firm resources in the strategic management

literature. The two theories can complement each other and both of

them are utilised in this dissertation.

As one of the emerging countries in the mobile phone industry,

Chinas mobile phone industry has developed for more than twenty

years. Motorola entered China as the first-mover in this industry,

with a long history of telecommunications market domination.

However, Samsung, the latecomer, surpassed Motorola and seized

its leading position in a short time. Compared with Samsung,

Motorola should have had an advantageous position due to its earlier

entry into this market. However, the late entrant, Samsung, in an

inferior position due to the lack of local resources and knowledge,

struggled against the leading competitors at the time of its entry.

Therefore, they might have needed to adopt different strategies in

terms of their own firm resources to confront the powerful

incumbents.

It can be seen that the sequence of entering a new market may


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influence the strategies implemented by multinational companies.

The first-mover may possess the local resources, such as the

distribution system, and may have built its brand name firmly in the

minds of customers at an early stage. All of these create entry

barriers to those who follow. The timing for a newcomer is important.

It is easier to succeed when the market is in a transition period, such

as when a country is changing its policies and when there is

development of new technology in an industry or a shift in consumer

behaviour. The economy of China is growing rapidly and it is in the

process of transforming its traditional economic structure, thus, it

offers many opportunities for multinational companies.

Research q ues t ion s

The purpose of this research is to analyse and discuss whether the

sequence of entering a new market will influence the strategies

adopted by those multinational companies with different firmresources. In addition, it is also attempts to illustrate how a latecomer

to an industry can overcome latecomer disadvantages and

successfully come to stand in a leading position by means of its firm

resources. Conversely, why and how a first-mover suffers at the

hands of the latecomers, even though they are in an advantageous

position, will also be examined. Finally, the dissertation also tries to

answer whether the first-mover advantage is sustainable in an

industry. All of these research questions focus on the distinctive firm

resources held by different companies and are explored and discussed

in terms of the resource-based view, with an emphasis on the


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evolvement of firm resources and capabilities.

The resource-based view in strategic management has been

developed theoretically and practically tested (Barney et al., 2001).

The theory has diffused into many fields of study, including human

resources (Wright et al., 2001), marketing (Srivastava et al., 2001),

international business (Peng, 2001), and first-mover advantages

(Lieberman and Montgomery, 1998). The resource-based view is

considered as one of the top three most profound theories in exploring

emerging economies (Hoskisson et al., 2000). Furthermore, it is also

appropriate when probing into the complexity of competition in

emerging economies (Peng, 2002). Therefore, it is proper to apply the

RBV to the study of the mobile phone industry in China.

The answer to whether the first-mover advantage is a source of

sustainable competitive advantage is still debatable (Li et al., 2003).

Empirical studies relating to the first-mover advantages consist of

many industries and markets, such as financial products (Tufano,

1989), the pharmaceutical industry, and the frozen food industry

(Sutton, 1991). However, most of these studies have been made in

the United States (Lieberman and Montgomery, 1998). Therefore, it

might be interesting to study the first-mover advantages in other

countries. On the other hand, Lieberman and Montgomery (1998)

suggest that it will be of great help for further study if researchers can

integrate research on first-mover advantages with the RBV theory. For

these reasons, the resource-based view of the firm and the


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first-mover advantages will be jointly applied to Chinas mobile phone

industry in this dissertation.

1.3 Research St ru c tu r e

The dissertation involves six chapters. The first chapter describes the

background, clearly indicates the research questions and outlines the

research structure. In the second chapter, the relevant literature on

strategic management is reviewed. The literature review is organised

into three parts. The broadest layer is the PESTEL analysis used to

examine the macro environment. The next layer is Porters five forces

model used to analyse the characteristics and threats within an

industry. The last part relates to the organisational level, the

resource-based view, and it suggests that firm resources determine

firm strategies and are the key to achieving a competitive advantage.

In addition, the literature on first-mover advantages is discussed and

the link between first-mover advantages and the resource-based view

is highlighted. The third chapter describes the methodology of this

dissertation. Moreover, for greater understanding, a double-case

study is used.

The fourth chapter explores Chinas mobile phone industry, giving a

portrayal of Chinas macro environment and then identifying the

sources of threats in Chinas mobile phone industry. PESTEL is applied

to evaluate the macro environment in China, whereas Porters five

forces model is utilised to assess the threats in Chinas mobile phone

industry and to check which force is the most influential to the


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industry. The interplay between the main players in this market

determines the industry structure, which then significantly influences

the main player again in return. Moreover, the drivers of the

development of the mobile phone industry and the characteristics of it

are also considered.

The fifth chapter contains a case study. Two leading global mobile

phone manufacturers, Motorola and Samsung, are selected to stand

for the major manufacturers in this market. After briefly introducing

their backgrounds, their resources are compared and their strategies

are reviewed and discussed in light of this. The companies are

examined in depth in terms of their R&D capability, brand name, and

other specific firm resources. This research examines how these firm

resources and capabilities evolve over time and how the two

companies exploit them in response to the environmental changes,

with an emphasis on the linkage between entry order and the

accumulation of firm resources. The first-mover concept is examined

using a resource-based perspective. Finally, the dissertation

concludes with a discussion and by outlining the limitations and

possible future studies.


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Chap t e r 2 : Li te ra t u r e Rev iew

A strategy is a plan for the actions taken to attain one or more

organisational goals (Morris, 2005:53). The task of strategy

formation is one of achieving a match between the organisations

internal skills, capabilities, and resources on the one hand and all of

the relevant external considerations on the other hand (Thompson

and Strickland, 1986:74, cited by Morris, 2005). In other words, in

the strategic management process, both external analysis and

internal analysis are needed to be taken into consideration if a firm is

eager to formulate high performance-generating strategies. The

external analysis includes the realisation of the macro environment in

which a firm operates and the attributes of the industry that the firm

belongs to. In this way, it is possible for a firm to discover the potential

threats and opportunities in the environment. On the other hand,

internal analysis helps to determine the strengths and weaknesses of

a firm and then helps the firm to conceive and implement strategies

that can exploit opportunities or neutralise the threats that may exist.

Firms have their own unique strengths and weaknesses in coping with

the external environment and industry structure. However, these are

not fixed and change gradually over time. A firm should realise the

impact of their environment on the level of performance. Therefore,

understanding the external conditions and the industry structure is a

good starting point for a strategic analysis. Environmental models

help identify the possible resources of a firm, whereas resource-based


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models advise on the further attributes needed to be held by those

resources that allow them create sustained competitive advantages

(Barney, 1991). These two approaches view the same issue from

different perspectives and can complement each other to some

extent.

2.1 Ex t e rna l Ana lys is

Firms usually have to confront uncertain and complex external

environments. This turbulence and complexity may damage a firms

financial performance. In order to reduce the impact, a firm has to

also be able to correspond to the dynamic external environment. In

other words, it is of great important to realise the impact on industry

and firms resulting from the external environment. Therefore,

efficient analysis tools for the external environment are essential. The

external environment analysis includes the macro environment and

the industry environment (Johnson et al, 2006). PESTEL analysis is

useful in analysing the general environment in which firms operate,

whereas Porters five forces model is valuable in identifying the

sources of threats within an industry.

2.1 .1 PESTEL An aly sis

The broad environment consists of six environmental forces: political,

economic, social, technological, environmental and legal (Johnson et

al., 2006). PESTEL analysis is usually applied to analysis of the

general environment. These elements of the PESTEL framework work

dependently and may influence the others. As any one of them


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changes, the general environment will also change. There are some

drivers listed on the PESTEL checklist that can help firms to depict the

general environmental conditions. These drivers vary from country to

country, thus it very hard to identify them. If firms can recognise the

key drivers behind the changes, they can develop strategies in

accordance with the environment and are more likely to deal with the

change immediately. In addition, it is also useful for firms to forecast

the future trends, examine the impacts, and thus conceive

appropriate strategies, especially in uncertain environments (Johnson

et al., 2006). On the other hand, the PESTEL model can be associated

with the five forces model to forecast and shape the future structure

of an industry (Faulkner and Bowman, 1995).

2.1.2 F ive For ces Analy s is

The next layer in external environment analysis is industry. An

industry is defined as a group of firms producing similar goods or

services for the same market (Faulkner and Bowman, 1995:39).

Porter (1980:5) defines an industry as the group of firms producing

products that are close substitutes for each other. Porter (1980)

suggests that industry structure can strongly affect the competitive

rules in an industry and that the forces in an industry usually affect all

the firms in the industry, since these operate their business in the

same environment and for similar customers. The information

regarding the business environment and the competitors is

particularly important. Therefore, it is crucial for firms to analyse and

assess the industry before deciding to commit to it. There are many


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models developed to identify the environmental threats and

opportunities facing a particular firm. The most widely known and

used one is the five forces framework made by Michael Porter

(1980).

Environmental threats are the external factors, such as competitors,

people, or organisations, which are able to negatively affect the

performance of a firm (Barney, 2007). Since firms are looking for

competitive advantages, it is essential for them to identify the

environmental threats that may reduce their performance. Threats

can increase the degree of competitiveness of an industry, increase

the costs and decrease the revenues, and thus, reduce the level of a

firms performance. In the five forces model, Porter identifies five of

the most general threats confronted by firms in their operational

environment. According to Porter (1980), the attractiveness and

profitability of an industry are strongly related to the structure of the

industry, and, five competitive forces operating in the industry mainly

determine the industry structure. Therefore, the critical task of a firm

is to find the best position in this industry from where it can protect

itself from the threats and have command of the industrial situation

(Porter, 1979).

On the other hand, the model points out that an attractive industry,

from the perspective of the incumbent firms, is one where the five

forces are low, whereas an unattractive industry is one where the

power of the five forces is high. The five common environmental


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threats in the five forces model are the threat of entry, rivalry,

substitutes, suppliers, and the threat of buyers. The five specific

attributes can determine the level of industry competition and

profitability together. Suppliers, customers, substitutes, and potential

entrants can be regarded as competitors from a broader perspective.

There are various sources of the five forces and they will be discusses

in turn. It should be noted that if the industry condition changes, the

threat of entry will change as well (Porter, 1979).

Th e t h r e at o f e n t r y

New entrants to an industry are attracted by profitability and increase

the competition in an industry, and may reduce the market share and

decrease the profitability of the incumbent firms. The threat of entry

depends on the cost of entry and this depends on the barriers to entry.

Higher barriers of entry can increase the cost of entry and deter

potential competitors from entering the market. There are five main

sources of barriers to entry (Porter, 1979, 1980):

1. Economies of scale: Economies of scale can act as a barrier to entry

when the optimal size of entry to this market stands for a large

percentage of market supply. Therefore, the market is easily

exceeded by the supply and new entrants may inevitably accept a cost

disadvantage because they do not produce at the optimal level of

production. Therefore, this will discourage new entrants from

competing with incumbent firms.


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2. Product differentiation: Brand identification possessed by

incumbent companies can deter entry because it is costly for potential

entrants to overcome customer loyalty. On the other hand, incumbent

firms can create brand recognition by advertising or superior

customer service to differentiate themselves with new entrants.

3. Capital requirement: The need for large amounts of capital

investment in an industry for it to compete produces a barrier to entry,

especially when the expenses are unrecoverable. Companies who are

unable to obtain enough financial resources may give up on entering

the market.

4. Cost advantages independent of size: The incumbent firms may

have a wide range of cost advantages, irrelevant to economies of

scale or their size, compared with new rivals who are at cost

disadvantages. Cost advantages can create a barrier to entry and

incumbent companies can generate these advantages from

proprietary technology, specific know-how, access to the best raw

materials or locations, and the experience of a learning curve.

5. Government policy: Governments also play an important role in

creating entry barriers. They can set up policies, regulations or

standards to directly or indirectly control the amount of firms

operating in an industry.


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The th r ea t o f r i va l r y

Not only new entrants but also existing competitors can influence the

performance of a firm in an industry. The intensity of rivalry among

existing competitors is another threat faced. If the competition in an

industry is high, the attractiveness and profitability of it are more

likely to be low.

When the number of competing firms is large and the sizes of these

firms are nearly the same, it is more likely to generate a high level of

rivalry. In addition, slow industrial growth also results in a high level of

rivalry. The industry that ceases growing makes firms compete for

their market share (Porter, 1980). A firm willing to enlarge its market

share must do so at the expense of other competitors market shares.

Furthermore, if the products in the market have no differentiation to

buyers, it will lead to intense price competition because customers

can easily find other alternatives.

The th r ea t o f subs t i t u t es

Firms compete with others not only in their industry but also in other

industries producing substitute products that can meet roughly the

same customer needs. The substitutes may affect buyers willingness

to pay (Brandenburger, 2002). They can place a ceiling on the prices

firms in an industry can charge and thus limit the potential profits

(Porter, 1980). Thus, the substitutes can also threaten a firms

financial performance.


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The th rea t o f supp l ie rs

Suppliers provide all kinds of raw materials. They can threaten the

profitability of a firm by increasing the prices or decreasing the quality

of products supplied by them. The greater the bargaining power of

suppliers, the greater the threat to a firm. Suppliers can be very

powerful in some conditions. The threat of supplier is great when a

few firms mainly control their industry or the firm is not the major

customer of the supplier. Moreover, suppliers can be relatively more

powerful when the products or services provided by them are

differentiated or exclusive. In addition, if there are no substitutes

competing with the suppliers, they can take advantage of their unique

position and squeeze more profits from the purchasers. Finally,

suppliers may threaten the firms they supply when they have the

ability to integrate forward. By doing this, they become both suppliers

and rivals and enter the firms industry to compete with them.

The th r ea t o f buye rs

Buyers purchase the products or services from firms. Buyers can

reduce a firms revenue by cutting prices or asking for higher quality

or greater services while they are in a relatively stronger position

compared with the producer. Buyers can be very powerful in some

conditions: Firstly, if the number of buyers is small or the purchases

are concentrated on or dominated by few buyers; Secondly, if the

products or services are standard or not differentiated, the buyers can

easily find alternative suppliers; Thirdly, if the purchase of the

products or services occupies most of the buyers purchases or the


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buyer earns low economic profits, they are likely to be higher price

sensitive and demand lower prices. Finally, the buyers may be very

threatening when they have the ability or skills to integrate backwards

and become the suppliers themselves. They can obtain better

bargaining positions because they can be potential rivals and compete

with the supplier.

S u m m a r y

The five forces framework is useful for analysing the structure of an

industry. Brandenburger (2002) praises Porters model for building a

clear vertical chain of economic activities running through the main

players of the chain, from suppliers through business entities and

then to the buyers. The analytical framework can help a firm

comprehensively analyse its industry as a whole (Porter, 1980). A firm

can develop an effective strategy to counteract the negative effect

resulting from the five forces after fully understanding the five

features of the industry (Porter, 1985). The dominant forces are

different from industry to industry and from country to country. The

stronger the competitive force or forces influence the profitability of

an industry, the greater the importance of them in determining the

strategy (Porter, 1979). The genuine advantage of this approach is to

help managers to assess the five forces operating in the industry and

thus to develop a broader insight into the market environment.

2 .2 I n te rn a l A n a l y si s

Having analysed a firms macro environments and industry structure,


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the internal strengths and weaknesses can certainly not be neglected.

Knowledge of the companys capabilities and of the cause of the

competitive forces will highlight the areas where the company should

confront competition and where avoid it (Porter, 1979:143). Porter

suggests that a firm can determine which market to compete in or

avoid after fully understanding the power of the five forces and the

strengths of the firm. In other words, after analysing the industry

structure, it is essential for a firm to realise its strengths and utilise

them well to deal with the five forces and generate competitive

advantages.

Strengths for a firm may include brand reputation, innovative

technology, strong distribution channels, large market share, etc. In

order to develop an effective strategy, a thorough understanding of

the strengths and weaknesses of the firm is required. Traditionally,

SWOT analysis is used to identify a companys external opportunities

and threats as well as the internal strengths and weaknesses. In

comparison with SWOT analysis, the resource-based view mainly

focuses on the firm resources and examines the relationship between

the internal resources of a company and the level of its performance

(Barney, 1991).

2.2 .1 Resour ce-Based V iew Ana lys is

Wernerfelt (1984) was the first to articulate the resource-based view.

He argues that the key resources controlled by a firm allow it to

achieve sustainable competitive advantages. Barney is one of the late


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contributors and he explicitly discloses the four characteristics of key

firm resources (Barney, 1991, 2007).

The resource-based view of a firm puts emphasis on the resources

controlled by a firm and regards them as the source of competitive

advantage (Barney and Hesterly, 2006). A resource is meant as

anything which could be thought of as a strength or weakness of a

given firm or those (tangible and intangible) assets which are tied

semi-permanently to the firm (Wernerfelt, 1984: 172). Barney

(1991:101) defines that firm resources include all assets, capabilities,

organisational processes, firm attributes, information, knowledge, etc.

controlled by a firm that enable it to conceive and implement

strategies that improve its efficiency and effectiveness. Therefore,

they can be regarded as the strengths of a firm. Firm resources are

tangible or intangible. Tangible resources are physical resources, such

as facilities and equipment, while intangible resources include

know-how, a firms culture, and reputation.

On the other hand, resources can be classified into four categories:

financial capital resources, physical capital resources, human capital

resources, and organisational capital resources (Barney, 2007).

Financial capital resources are those that can be used as money

resources to support the strategies, including equity, retained

earnings, and debts. Physical capital resources include machinery,

geographic locations, and buildings. Human resources contain

knowledge, experience, and human training. Organisational capital


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resources comprise organisational culture, structure, and informal

systems. However, it should be noted that not all aspects of financial,

physical, human, and organisational capital are able to contribute to

competitive advantages and to be considered resources (Barney,

1991). Some of a firms capital may have no influence on the process

of shaping and carrying out competitive strategies while others may

lead to inefficient strategies.

The internal view suggests that obtaining competitive advantage

mainly relies on the resources controlled by the firm. Companies who

command valuable resources or have distinctive capabilities that few

firms have, may gain sustainable advantages. However, the

consequence is based on two assumptions (Barney, 1991). Firstly,

resources are assumed heterogeneous. Firms operating in the same

industry may have different stock of resources. They may differ from

each other in terms of the different resources they hold. Some firms

may excel in the rest of the industry in some specific activities.

Secondly, he assumes that the resources are immobile. Some

resources may not be perfectly mobile among firms and it may be

expensive for rivals to imitate or develop them. Therefore, the

resource differences may last a long time. However, it should be

noticed that sustainability is determined on the basis of the likelihood

of the competitive advantage being duplicated (Barney, 1991). This is

opposes of Porters (1985) definitions, as he defines sustainable as a

competitive advantages that can last a long time.


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Naturally, not all the resources have the ability to generate

competitive advantage. There are some characteristics of firm

resources that allow them to create competitive advantages. Barney

(1991) develops a tool to test whether the different resources

controlled by firms have the potential to produce competitive

advantage. By doing this, a firm can determine its internal strengths

and weaknesses. He suggests four features that must be

simultaneously held by potential resources: the resource must be

valuable, rare, imperfectly imitable, and not be equivalently

substituted.

Charac te r is t ics

1. Value resource: Resources are valuable when they are able to help

a firm conceive and implement strategies that can exploit

opportunities or neutralise threats and enhance its performance

(Barney, 1991).

2. Rare resource: Furthermore, the valuable firm resource should not

be held by a large number of firms. If such a resource does not solely

belong to a firm but is simultaneously owned by many firms, it is

useless for generating competitive advantages.

3. Imperfectly imitable: In addition, the resources are needed to be

imperfectly imitable. That is to say other firms are not able to copy

and acquire their value and rare resources. There are three conditions

under which the firm resources can be imperfectly imitable. Firstly,


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the resource is closely tied up with a firms history or specific historical

circumstances. With the development of a firm, it obtains knowledge,

accumulates experience, develops operating systems, and thus

cultivates unique resources. Secondly, the resource has casual

ambiguity. The uncertainty of the causal relationship between the

resources and effective performance limits the imitation of rivals.

Rivals do not know what and how to copy it since they do not

understand the causal links between the actions and performance.

Finally, the resource is socially complex and it is hard for firms to

utilise their ability to manage and affect it in a planned way. A case in

point of this is the organisational culture (Barney, 1986).

4. Not equivalently substitutable: There must be no alternative

resources that are equivalent substitutes. Rivals with this kind of

substitute resource that can deliver the same effect and can conceive

and implement a similar strategy in different way to compete with the

firm in the same market. Therefore, the firms competitive advantage

will vanish.

2.2 .2 Resour ce Por t fo l io Chang e

Resources that have possession of the four foregoing attributes are

called VRIN (value, rare, imperfectly imitable, and not equivalently

substitutable) resources (Barney, 2007). The resource-based view

discusses the links between the firm resources and firm performance

and indicates that firms can generate competitive advantages with

firm resources. However, a firm cannot achieve advantages merely


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because they have abundant resources. In practice, a firm needs to be

able to manage and combine the resources and apply them to

strategies to achieve competitive advantages. In other words, a

company must be organised to fully exploit the VRIN resources. This

corresponds to the integrated framework, the VRIO framework,

introduced by Barney and Hesterly (2006) to supplement the VRIN

framework. O represents organisation and puts emphases on the

complementary resources, such as policies and process, which can

facilitate the most use of VRIN resources.

Moreover, from a long-term view, strategies need to be adjusted over

time in compliance with the changing environments. The values of

resources may perish or disappear as the environment changes.

Therefore, in addition to protecting the existing resources from being

imitated, it is essential for firms to pursue new resources in the

evolvement of the strategies to maintain long-term competitive

advantages (Ambrosini, 2007). In other words, the competition in a

market may lead to the change of firm resource portfolio over time.

2 .2 .3 Fi rs t -Move r Advan tages

Many empirical studies illustrate that pioneering firms acquire

superior resources and capabilities, enjoy the first-mover advantages,

and thus generate higher levels of market share and financial

performance than later entrants (Frawley and Fahy, 2006). First

movers are considered to have the ability to seize or appropriate

various kinds of resources in advance of other rivals. These


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advantages contribute to the ability of early entrants to earn positive

economic profits and are defined as the first-mover advantages

(Lieberman and Montgomery, 1988, 1998). The first mover may be

able to forestall various types of resources. Lieberman and

Montgomery (1988) argue that there are three key sources bringing

about first-mover advantages: technological leadership, pre-emption

of assets, and buyer switching costs.

The technological leadership advantages result from successful

patents and R&D and the learning or experience curve advantage.

The first-mover can take the lead in developing the technology critical

to the industry. Moreover, if the technology can be patented or

protected from being imitated by rivals, the first mover can gain

advantages. However, patents are useless in some industries and in

some countries where the technologies are easy duplicated by the

followers. The study of Levin et al (1987) indicates that advantages

derived from patents are less important than the learning curve

advantages. The learning curve advantages arise when the costs fall

with cumulative output. The pioneers can gain low cost positions if

they can maintain a major market share and when the learning can be

kept proprietary (Lieberman and Montgomery, 1988). Moreover, the

learning curve advantages can create considerable entry barriers

under certain conditions (Spence, 1981).

The first mover may gain advantages through pre-occupancy of rare

resources. These assets may be non-mobile or mobile physical assets


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(Lieberman and Montgomery, 1988). The non-mobile assets consist

of natural resource deposits and superior locations while the mobile

assets include employees, distributors, and suppliers. However, the

advantages derived from mobile human resources are considered

difficult to maintain. Moreover, the pre-emption of prime positions in

space is another kind of advantage, such as the geographic space, the

product space, and the technology space. First-movers can establish

and strengthen their positions by occupying superior geographic

locations or broadening product lines to minimise the space available

to the followers (Lieberman and Montgomery, 1998).

First movers may be able to influence the purchasing manner of

consumers and consumer preferences may be moulded to favour the

first entrants products (Lieberman and Montgomery, 1998). The late

entrants need to spend more resources than first entrants to attract

customers from the pioneers on the grounds of the buyer switching

costs. Switching costs include the money and time spent in adapting

to the new products. First-mover advantages arise when the

switching costs are high. Furthermore, early entrants may generate

value when buyers have imperfect information about the product

quality. It is reasonable for customers to adhere to the brands that

satisfy them for the first time. Therefore, it is easier for pioneers to

pre-empt customer perception and generate brand loyalty than late

entrants. The empirical studies of Kardes and Kalyanaram (1992) and

Carpenter and Nakamoto (1994) demonstrate that the entry order

may influence consumers perception of brands and influence the


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consumer preference formation. First entrants may be able to

establish a unique position in the minds of buyers.

2.2 .4 The Syner gy o f FMA and RBV

Even though the first-mover advantages (FMA) are broadly discussed

in literature, it is criticised for being overly general. As a focus for

empirical research, the concept of first-mover advantage may be too

general and definitionally elusive to be useful (Lieberman and

Montgomery, 1988:52). For further work, Lieberman and

Montgomery (1998) suggest synergy with the resource-based view

of the firm (RBV).

Both FMA and RBV are distinguished current research approaches.

FMA is considered too general and lacking in a theory base while the

RBV is criticised for the absence of empirical studies on the

accumulation of resources and capabilities over time (Porter, 1991).

The combination of FMA and RBA can complement each other and

work jointly for further studies. The resource-based view provides the

framework for the deeper and more complicated studies of the entry

order. Conversely, the empirical studies on first-mover advantages

offer practical knowledge of the evolution of firm resources and

capabilities and provide potential research aspects for the

resource-based view (Lieberman and Montgomery, 1998). Kerin et al

(1992) also approve of using the resource-based view as studying the

first-mover advantages needs insights into a firms resources and how

they are transformed into advantages. Therefore, it would be


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beneficial if the research regarding first-mover advantage is

repositioned within a wide theoretical framework of the

resource-based view.

First-mover advantages occur within a multiple process and it is

assumed that there must be some asymmetry between competitors

that the early entrants can exploit (Lieberman and Montgomery,

1988). In other words, the first-mover advantages arise when the first

entrant owns some exclusive resources in comparison with other

firms. This is corresponds to the statement of the resource-based

view. Barney (1991) argues that for the existence of first-mover

advantages, the competing firms must be heterogeneous in the

resources they possess. That is to say, if the firms in an industry are

homogeneous in terms of the resources they hold, it is impossible for

any firm to acquire the advantages from early entry.


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Chap t e r 3 : Me th odo logy

3 .1 I n t r o d u ct i o n

A proper methodology must meet the needs and criteria of the

research. There are many kinds of research methods. Every approach

has its own advantages and disadvantages. The following section

introduces a variety of research methods available and illustrates how

this research is undertaken.

3 .1 .1 Quan t i t a t i ve and Qua l ita t i ve Meth ods

Generally, there are two types of methodologies, the qualitative

method and the quantitative method. Quantitative research focuses

on statistical analyses and picks samples at random from a given

population. Conversely, qualitative research engages in improving the

understanding of a phenomenon and needs to select the participants

purposefully (Polkinghorne, 2005). The primary function of using a

quantitative approach is to provide comparable numeric data by

which the researcher can draw conclusions. It can avoid subjective

interpretations and personal perceptions to a certain degree and

generate objective outcomes.

Van Maanen (1983:9) defines the qualitative approach as an array of

interpretative techniques which seek to describe, decode, translate

and otherwise come to terms with the meaning, not the frequency, of

certain more or less naturally occurring phenomena in the social

world. In other words, the primary task of the qualitative approach is


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to congregate a general idea rather than quantify individual

experiences. The data gathered by qualitative research is narrative

and descriptive rather than numeric and depends on researchers

explanations to develop the ideas.

The scientific method is a systematic step-by-step procedure

following the logical process of reasoning (Clover and Balsley,

1984:19). There are two kinds of reasoning, inductive reasoning and

deductive reasoning. Inductive reasoning is utilised to establish a new

theory while deductive is used to test an existing theory. Deductive

reasoning starts with an existing generalisation and tries to test

whether it can be adopted by a specific case (Clover and Balsley,

1984). Inductive reasoning tries to reach a general conclusion by

studying many individual cases (Hyde, 2000). Qualitative research

usually adopts inductive reasoning whereas quantitative research

usually applies deductive reasoning (Yin, 2003a).

3 .1 .2 W hy Qua l ita t i ve Meth od

The selection of research methods depends on the research question

to be explored. The aim of this research is to examine the relationship

between the order of entry and the firms performance in terms of the

resource-based view. For the purpose of this study, the research

needs to take into account the evolution of a firm and explore the

accumulation of its resources and the difference between firms in

industry. Large-sample studies are useless since they can not unravel

the complicated interaction between those variables (Rouse and


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Daellenbach, 1999). If a researcher tries to study two specific cases to

reach a general conclusion, this is the process of inductive reasoning.

Hence, quantitative approaches will not be effective in the research of

competitive advantages, whereas the qualitative approach allows the

researcher to gain comprehensive understanding of the research

issues.

Furthermore, organisational phenomena can be portrayed more

clearly and in detail via qualitative methods (Yin, 2003a). In the study

of firm resources, qualitative approaches enrich their depiction and

help the researcher to disclose the key resources contributing to

sustainable competitive advantages. In addition, most resources

contributing to sustained competitive advantages are intangible and

difficult to assess (Hall, 1993). Given such limitations, Rouse and

Daellenbach (1999) suggest employing qualitative approaches to

analyse the intangible resources.

When exploring the high and low performance of firms, Reed and

DeFillippi (1990) advise applying a case study approach by which

firms can be compared in terms of their performance. Zahra and

Pearce (1990) also support this perspective. A case study approach is

employed in this research for reasons given in the following section.


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3.2 Research Design

3.2.1 Case St ud y

Which approach to use depends on the needs and assumptions of the

research, and must be coherent with the purpose of the research.

Case study is a widely used approach to collect deeper and more

detailed information from organisations and it is believed to be a strict

research strategy (King, 2004). A case study is beneficial for deeply

appreciating and analysing issues. Yin (2003a: 8) in appreciation of

case study states that, its unique strength is its ability to deal with a

full variety of evidence-documents, artifacts, interviews, and

observations. In addition, it is appropriate to use how and why

questions instead of what and how much questions (Hartley, 2004)

because the case study strategy lays stress on examining interactions

between the events rather than finding out context from the research.

Moreover, a case study serves as the best approach to realise the life

in an organisation in detail (Hartley, 2004). These features of a case

study approach cater to the research questions and the purpose of

this dissertation. The proposition of this study is to determine whether

and how a latecomer in an industry can become an industry leader by

exploiting its firm resources.

The development of an industry or a firm and evolvement of firm

resources are very complicated and take a long time. A case study

presents an account of what happens to a business or industry over a

number of years (Hill and Jones, 2007). As a result, it is appropriate to

undertake a case study in this research. Furthermore, the implications


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of the theories are clearer when they are applied to case studies. The

theories help disclose the true nature a firm and allow researchers to

analyse and evaluate the actions or strategies adopted by a firm. The

dissertation is proceeds under the theory of the resource-based view.

The resource-based view will give clear explanations when practically

applied to the case study.

After deciding to adopt a case study, there are still some things need

to be taken into consideration. The research procedure being used

and the organisations being studied are needed to be made clear. The

background and history of an organisation can provide a general

overview and map out its current functions and operations (Hartley,

2004). In a case study, after gaining an overview, the researcher can

start to plan out the research. According to Yin (1994), making a

research protocol is beneficial to collecting data. It provides a

direction for the research and makes every step clear, from the

research theories, the research question, methodologies, to the time

control. Moreover, the protocol is flexible and the researcher can

adjust the strategy in the course of the research. In this research, the

contents, which outline the structure of the dissertation and highlight

the points, are made in advance. However, the contents are flexible

and can be modified in line with the research questions and the

discovery of new information.


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3.2.2 Select ion of Case Com pan ies

The primary concern is how to choose the case study organisations

(Hartley, 2004), whose features need to fit the purposes and the

needs of the research. Moreover, the researcher also needs to take

into account the possession of resources and the time required to

undertake this research to determine how many organisations to

study. Before selecting the cases, extensively researching relevant

articles or the press may be more beneficial than taking a more rash

approach. Yin (2003b) points out that a researcher needs to list the

possible cases in advance and screen which cases can conform to the

topic and to avoid choosing cases that are too specific and confusing

for readers. On the other hand, if the researcher has the ability to

conduct more than one case study, the level of the reliability of the

findings can be enhanced through the comparison (Hartley, 2004). In

addition, for the purpose of comparison, the degree of the contrast

between alternative organisations also needs to be of concern.

Stake (1995) suggests that researchers to organise research issues

into a few research questions. The major research question of this

dissertation is to explore why and how latecomers to an industry can

overcome the inherent disadvantages and successfully come to stand

in a leading position by means of firm resources. Clearly, there are

two players in this research question, the first-mover and latecomer.

Therefore, it is appropriate to use two cases in this research. One

represents the first-mover whereas the other represents the

latecomer. In addition, it is beneficial if the two companies operate in


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the same industry but contrast with each other. Therefore, this

dissertation examines two companies within the same industry.

Rouse and Daellenbach (1999) advise a sample selection process with

four steps. The process starts with the selection of the industry,

continues with the comparison of the firms performance, and ends in

identifying firms with high or low performance. The choice of a specific

industry is important because industry factors affect the strategies of

firms within it (McGahan and Porter, 1997). Identifying the firms with

low and high performance facilitates a clear comparison. Nevertheless,

it should be noticed that gaining a deep knowledge and understanding

of the firms is essential in this process and it does not make sense to

simply select the best and worst performing firms for case study

(Rouse and Daellenbach, 1999).

Two cases are selected from foreign mobile phone manufacturers with

well-known brand names and reputation. Both of them have national

representation and occupy a large number of the market share. There

are considerable differences between business cultures and practices

in the US and Korea. However, the researcher simplifies the cultural

complexity and puts emphasis on the complexity of resources. Both

Motorola and Samsung are leading international mobile phone

manufacturing firms in China. Motorola is the first global mobile

phone producer with a long history in telecommunications to enter

China, in 1987.Motorola dominated Chinas mobile phone market andits market share was more than half during the 1990s (Simpson,


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2005). Motorola took the advantage of being the first-mover and

enjoyed the boom of the mobile phone market. However, due to the

increasing levels of competition, its market share is dropping and both

local and foreign manufacturers are threatening it.

Samsung followed on the trail of Motorola, Nokia, Ericsson, and

Japanese companies when the market had become highly competitive.

The achievement of Samsung in mobile phone industry is remarkable.

It has been active in the mobile phone industry for merely a short

period of time but has jumped to the top ranks of mobile phone

manufacturers. According to the data released by China-based CCID

consulting, Nokia, Samsung, and Motorola were the top three vendors

in terms of the production of mobile phone in China in 2007 (Shen,

2008). In addition, both of them are skilled in the Code Division

Multiple Access (CDMA) model and Motorola had always been the

number one player in Chinas CDMA market. However, Samsung

exceeded Motorola for the first time and predominated the CDMA

market in China in terms of market share in 2003 (Lee and Lee, 2004).

As shown in Table 1, in 2005, Samsung still led the CDMA market, in

terms of sales value, with a market share of 31.16% whereas

Motorola only occupied 10.18% (Hwang, 2006).

Case analysis of Samsung provides a complete description of their

successful take-over of the industry dominance of Motorola. In

conclusion, Motorola and Samsung are selected in this dissertation

because they provide good examples for the concepts to be studied


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and they contrast well with each other.

Table 1 Chinas Mobile Phone Market Occupation by Brand in 2005

Source: DIGITIMES, 2006.

3.3 Sources o f Data

3 .3 .1 Dat a Co l lec t ion

According to Huettman (1993), convincing findings are based on

multiple resources. In other words, using different research

approaches can confirm the credibility. Because data is often

scattered and difficult to find, adopting different kinds of information

collection methods can help researchers to gather the information

required. However, the availability of data influences the type of

information gathered as well as affecting the collection approach

adopted (Clover and Balsley, 1984). Due to the time limitations and


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the difficulties gaining access to the organisations, the sources of data

in this dissertation are mainly external.

In order to make up for the restrictions, the research base is collated

from extensive sources of secondary data. Comprehensive and

comparative data regarding organisations is critical for a full

understanding of competitive advantages (Rouse and Daellenbach,

1999). These resources will serve as the base for further comparison.

Sour ces o f da t a

As mentioned above, the difficulties in gaining access to the sources

of primary information leads a dependency on secondary data.

Secondary data is sometimes more useful than primary data and can

provide vast advantages (McDaniel and Gates, 1999). For example, it

can answer the research questions more economically and can also

help primary data to be interpreted more clearly.

The data collected via many sources, such as textbooks, academic

journals, corporate websites and annual reports, newspapers,

magazines, government websites and business press, are the primary

sources for this dissertation. The data is gathered and arranged in line

with the two mobile phone manufacturers. Different kinds of data are

collected for different purposes. Browsing the company websites and

reading annual reports, journals, and newspapers enables the

researcher to form a general idea of the industry and the firms.

Textbooks and journals are of great help for the literature review. The


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statistics provided on government websites, business magazines, and

newspapers help to map the trends of the industry and gain the latest

information. The review of both firms reports and external articles

offer a different view for comparison.

Eisenhardt (1989) argues that researchers should provide enough

evidence to support their opinions and allow readers to assess and

judge the arguments by themselves. In order to echo this

requirement, the researcher collects the figures, graphs, and the

statistical data in journals, newspapers, commentaries and websites

to enhance the credibility of the study. Numerical data is arranged in

tables or displays to make them clearer and include such things as

rankings and performance indices.

Data co l lect io n

In order to prevent the danger of being overwhelmed by the data, the

resources are carefully checked against the theories and only those

having relevance with the propositions are applied in this study. By

doing this, the bias of early impressions can be reduced to a certain

degree (Hartley, 2004). Moreover, the various kinds of resources and

evidence are reviewed and compared with each other to keep the

consistency of information and avoid contradiction.

In this research, the data is organised around the key theories (five

forces analysis, the resource-based view of the firms, and the

first-mover advantages), the key firms (Motorola and Samsung), and


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the key market (the mobile phone industry in China). Following this

data is examined and reviewed to see it fits the research questions or

not.

3 .3 .2 Lim i ta t i on s

Few resour ces

Barney et al. (2001) suggest a need for longitudinal analysis including

both qualitative and quantitative methods in the study of sustained

competitive advantages. Yin (2003a) also advises that using multiple

approaches and triangulation of data makes for a better paper.

However, given the limited duration of the research, it is challenging

for the researcher to conduct both approaches simultaneously. In

addition, using secondary data makes it difficult to carry out the

research critically as former analysis may influence the current study.

Case s tu dy

Even though the attributes of the case study approach are appropriate

for this dissertation, there are still some limitations and

disadvantages in implementing this technique. The data is collected

via literature research and second hand data regarding the two mobile

phone manufacturing companies and the study is constrained to

Chinas mobile phone industry. In a case study, generalising findings

to other social phenomena is essential (Eisenhardt, 1989). However,

sometimes it is difficult for one particular case to represent a general

view and that research results might not be applied across other cases.

This is the problem of a lack of representativeness (Hamel et al.,


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1993). In the point of Hyde (2000), if a specific case study can provide

sufficient information and have deep concern with the general

phenomena under investigation, it is possible to build a generalisation.

However, every specific case still has its own character and methods

that need to be taken into account when doing research.

In addition, the case study approach is also criticised for its lack of

rigidity (Hamel et al., 1993). The lack of rigidity refers to problems of

bias resulting from the researchers subjective point of view or the

information utilised. Researchers may have their own assumptions or

expectations about the research outcomes prior to the research

commencing. The bias arises especially when the information is

collected through personal observations and explained from personal

viewpoints.


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Chap t e r 4 : Ch ina s Mob i le Phone I ndu s t ry

4.1 The Macro Env i r onm ent o f Ch in a

Before starting out to examine Chinas mobile phone industry, it is

beneficial to understand the framework the industry exists in.

Although China is highly integrated with the world economy and

trades with other countries frequently, almost all economic activities

and large enterprises were owned or controlled by the government at

the beginning of the countrys history. The concentration on heavy

industry was the main driving force of economic development

(Williams, 2005). Nevertheless, China commenced gradually shifting

its economic structure from a planned economy to partial

market-oriented economy in 1978 (McKibbin and Woo, 2003). This

aimed at reducing the states interference in the market and this new

economic structure is undoubtedly a key explanation of the rapid

growth that was observed (Sachs and Woo, 2000). Significant

restructure and reform in China has led to a high average growth,

6.04%, in real per capital GDP in the period of 1978 to 1995

(Walmsley et al., 2006). The more open attitude also reflects

governments confidence in managing market competition and firms

capability to compete (Roseman, 2005).

A very large population is Chinas greatest resource. China has

exploited the competitive advantages in labour -intensive and

export-led manufacturing (Sachs and Woo, 2000). However,

constraints on foreign direct investments are still high and the vast


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bulk of the economy remains controlled by the state (Williams, 2005).

Considerable pressure has been exerted on foreign investors to

ensure technology transfer, especially in the case of joint venture.

This approach allowed domestic firms to acquire or cultivate new

technologies from foreign partners through joint venture or alliance to

enhance production efficiency and performance.

After the economic crisis of the 1980s and 1990s, The Chinese

government came to consider liberation a good therapy for economic

development and has gradually relaxed restraints on private

businesses (Nie and Zeng, 2003). In an effort to boost foreign

investment, China offered a number of incentives, such as reductions

in the rate of income tax. This proved successful and foreign

investment soared in 1993. However, the rate of growth in FDI

dropped in 1996. The absence of a well-regulated market and the

dominance of inefficient state-owned enterprises in some industries

cut down foreign investors confidence in China (Walmsley et al.,

2006).

Chinas accession to World Trade Organisation (WTO) at the end of

2001 helped remedy the fundamental problems within this market,

improve the business climate, and thus promote foreign direct

investment (Walmsley et al., 2006). In the agreement, China is under

the obligation to carry out many dramatic changes in trade-related

policies. The state has to eliminate both tariff and non-tariff barriers

and open the markets of service sectors (Nie and Zeng, 2003). The


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opening-up of the telecommunication sector enlarged the need of

mobile phones, benefiting the mobile phone manufacturers.

In addition, technological development goes hand in hand with

economic growth. With the support of the government, China has

made achievements in many fields. The access to foreign technology

through FDI, joint venture and licensing led to a positive influence on

industrial performance. The rank of China in the CIP (Competitive

Industrial Performance Index) jumped from 61 in 1985 to 37 in 1998.

This rise implies Chinas tight involvement in the global production

scheme (Zhao and Zhang, 2007).

In summary, China has created a more advantageous and

well-regulated business environment for the mobile phone industry in

the recent years. Higher economic performance and the huge

population make it attractive to investors. Technology development

also contributes to the foreign investment. A lower level of limitations

and higher degree of equality make it a favourable place to invest in.

4 .2 Ch ina s Mob i le Phone I ndus t r y

4 .2 .1 Overa l l Si t ua t ion

Chinas mobile phone market has undergone a dramatic development

and become the worlds largest mobile phone market. From Figure 1,

it can be seen that the number of mobile phone subscribers in China

grew gradually year by year between 1995 and 2006. The number of

users has risen significantly from 3.63 million in 1995 to 461 million in


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2006. It can also be seen that there was a significant breakthrough in

2001. The number of subscribers exceeded 100 million and climbed to

144.81 million in that year. In October 2007, the number ascended to

8.132 million breaking the record for single month growth (MII, 2008).

The high-speed growth is still maintained to this day. According to

recent statistics reported by MII (2008), the number of users

increased by 17.941 million in the first two months of 2008 and

reached to 565.227 million. The proportion of the subscribers to

population is also getting higher. However, the annual growth rate has

decreased gradually since 2000, as shown in Figure 1.

Figure 1 Development of Mobile Phone Market in China, 1995-2006

Source: Jin, J and von Zedt wit z, M. (2008) Technological Capability

Development in China's Mobile Phone Industry, pp. 333.


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The telecommunication sector consists of fixed and mobile phone

subscribers. According to Figure 2, the portion of mobile phone

subscribers in the telecommunications sector has increased steadily

since 2000. 2003 was the first time that the number of mobile phone

subscribers surpassed the number of fixed phone subscribers. The

proportion of the mobile phone industry came to 58.9% in 2007 and

China became the worlds largest market in terms of subscribers of

mobile phones.

Figure 2 The Proportion of Mobile Phone Subscriber in China,2000-2007

Source: Ministr y of I nformation I ndustry (MII ) Website

4 .2 .2 Com pe t i t i on be tw een Loca l and Fo re ign Fi rm s

China is the biggest manufacturing base in the world. Nearly half

(46.9%) of worlds mobile phone production, around 970 million units,


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in 2006 came from China (Circuits Assembly, 2007). The main

manufacturing sites are Shenzhen, Tianjin, Beijing, and Suzhou. The

five leading international mobile phone manufacturers, Nokia,

Motorola, Samsung, Sony Ericsson, and LG, have built manufacturing

stations in those areas. These places have constructed a mobile

phone supply chain in China.

Even though Chinas mobile phone market is dominated by

international vendors, the local manufacturers increasingly take the

lions share in this market. The production of mobile phone in China

was up to 279 million units in the first half of 2007. Nokia, Samsung

Electronics, Motorola, Sony Ericsson and LG Electronics contribute to

65% of total production in China. However, the market share of the

foreign manufacturers has decreased by 7% in comparison with the

record of 2006 (Shen, 2008).

In the ever-growing market, both foreign and domestic are competing

for the market share. In terms of domestic firms, price is the focus of

their competition while most of them are targeted at low-end market.

Conversely, foreign firms mainly concentrate on high-end market. The

ability to produce products at low manufacturing cost helps domestic

firms wrest market share from foreign rivals because Chinese

consumers rate price more highly than other features (Lenton, 2003).

Moreover, domestic manufacturers have accumulated a lot of

experience and knowledge through the development of new

technology and the cooperation with foreign business partners. In


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addition, domestic firms are likely to be able to design and provide

diversified mobile phones which fulfil Chinese customers needs. With

regard to sales channels, foreign firms mainly sell their products in big

cities whereas domestic firms prefer to establish their own distribution

channels which cover small and medium sized cities where the

demand of mobile phone is growing due to the increasing disposable

income (Lenton, 2003).

The low price strategy, the high speed of introducing new products,

and the ability to establish sales channels and meet the niche market

outside big cities facilitate the growth of domestic mobile phone

manufacturers.

4 .3 T r igge rs fo r Ch ina s Mob ile Phone I ndus t r y

Continued economic performance and the higher purchasing power of

customers, the deregulation and liberalisation of the mobile phone

market, a positive and favourable regulatory environment, and

increased geographic spread of network services jointly facilitate the

development of the mobile phone industry and drive mobile phone

penetration in China.

4.3 .1 Econom ic Deve lopm ent

With the rapid economic development, Chinas position on the

international stage is getting more and more important. Since the

start of a serious of reforms in 1978, China has achieved remarkable

average annual growth rates of gross domestic product, as shown in


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Table 2. This impressive economic performance has significantly

altered Chinas economic and social structure. A large proportion of

the labour force working in agriculture declined from 70.5% in 1978

to 44.8% in 2005 (National Bureau of Statistics of China Website,

2008). Chinas reduction of state control and monopoly power

resulted in fast entry for new firms. Furthermore, the open attitude

has attracted a large number of foreign direct investments and China

became the largest recipient of FDI in the world in 2003 (National

Bureau of Statistics of China Website, 2008). China has gradually

integrated with the world economy more tightly.

Table 2 presents Chinas average annual growth rate of GDP between

1978 and 2005. China reached a significantly high growth rate in 1984

and 1992, with an annual growth rate of 15.2% and 14.2 respectively.

Although there are some fluctuations during this period, the economic

performance is still astounding. In the face of the severe Asian

financial crisis in 1997, China remained strong and maintained a high

growth rate in the following years.

The continued economic growth has led to dramatic changes in

peoples lives and consumer behaviour. With increasing Gross

Domestic Product (GDP), the dominant income and peoples

purchasing power are greater than ever. Higher purchasing power

means people are more likely to pay for quality and expensive

products. The mobile phone is an example. In addition, the first time

buyer is rapidly increasing in China. Therefore, increasing economic


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growth plays a key role in promoting the speedy development of

Chinas mobile phone industry.

Table 2 Chinas Economic Growth, 1978-2005

Ye ar % Ye ar % Ye ar % Ye ar %

2005 10.2 1998 7.8 1991 9.2 1984 15.2

2004 10.1 1997 9.3 1990 3.8 1983 10.9

2003 10.0 1996 10.0 1989 4.1 1982 9.1

2002 9.1 1995 10.9 1988 11.3 1981 5.2

2001 8.3 1994 13.1 1987 11.6 1980 7.8

2000 8.4 1993 14.0 1986 8.8 1979 7.6

1999 7.6 1992 14.2 1985 13.5 1978 11.7

Source: National Bureau of Statistics of China Website, 2008

4.3 .2 Govern m ent Po l ic ies

The governments presence in Chinas mobile phone market strongly

effects and shapes the development of this industry (Nie and Zeng,

2003). The regulations and policies manipulate every movement and

every action of key players in it. In the past, the mobile phone

industry was regarded as a development priority and preferred by the

Chinese government (Jin and Zedtwitz, 2008). The government

supplied much support and domestic manufacturers were driven to

invest in technology development to compete with leading foreign

mobile phone manufacturers.

Furthermore, the states decisions can lead to a significant impact on

the success or failure of a firm. For instance, the national technology


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of telecommunication is decided by an authorised institution, the

Ministry of Post and Telecommunications (MPT). Only the interior

technologies of the products that are in accordance with the national

standards can get access to the market (Nie and Zeng, 2003).

Motorola suffered a great loss from the states adoption of GSM

technology, the European technology, instead of CDMA technology,

the American technology, in the transition from analogue to digital

mobile communication technology in 1994 (Business China, 1998).

During the following years, Motorola lost its leading market position.

Nokia outstripped the big rival and increased its market share at the

expense of Motorola.

However, the environment has improved and the governments

attitude became neutral after some needed reforms were made by the

state. In 1998, to promote open an environment and fair competition,

the Chinese government established the Ministry of Information

Industry (MII) as the administrative entity in charge of the

information technology related industries. MII receives and carries on

the affairs and business of many formal institutions; such as the

Ministry of Post and Telecommunications (MPT), the Ministry of

Electronic Industry (MEI), etc. Mobile phone manufacturing is also

under the control of MII (Nie and Zeng, 2003). MII is in charge of the

market through industry standards, regulation, and equipment

inspection (Low, 2005). The institutions reforms have strong

influence on the business practices in the mobile phone industry. In

terms of foreign companies, for example, building a good relationship


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with MPT and technology transfer is no longer a price for operating in

China (Nie and Zeng, 2003).

On the other hand, the influence of the Chinese government on the

mobile phone industry is getting looser as time goes on. After Chinas

formal accession to the World Trade Organisation (WTO) in November

2001, mobile phone service became open to foreign investors and the

tariff barriers and non-tariff barriers reduced. This opening of

telecommunication services provides huge opportunities for

international mobile phone manufacturers and reduces the risks of

doing business in China (Low, 2005). Moreover, it is expected to

create more demand for mobile phone production and thus increase

market competition (Nie and Zeng, 2003). With the open attitude

towards telecommunication service market, the Chinese government

issued more licenses to both domestic and foreign services providers

(Nie and Zeng, 2003). This has benefited not only service suppliers

but also manufacturers because the more service suppliers available,

the more the demand for telecommunication equipment.

In summary, it can be seen that initially the state actively participates

in and facilitates the development of the mobile phone industry.

However, after a series of reforms and liberation, the government is

gradually vacating the foreground and supporting the market

economy from behind. The mobile phone industry grew under the

control of the Chinese government; however, it still flourishes even as

the government loosens its grip.


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4.3 .3 Other Fac to r s

The favourable business and marketing environment in terms of the

global, country, and local market levels can foster growth and the

diffusion of the products (Kotler et al., 2005). With the liberation and

deregulation of the mobile phone market and the rise in purchasing

power resulting from continued economic growth and purchasing

power, the approving environment drives the prosperity of the mobile

phone industry.

However, there are still many other factors facilitating the growth of

this industry. Competition between mobile telecommunications

operators is also one of the major driving forces. Fierce competition

between system suppliers has led to the reduction of mobile phone

connection fees. Lower expenditure also promotes the dispersion of

mobile phones (Zhang and Prybutok, 2005). On the other hand, the

mobile phone now symbolises a personal lifestyle rather than a

communication tool. The emerging technology enhances companies

capabilities to incorporate new features in mobile phones to

differentiate with other products to attract consumers and gain a

market share in an almost mature market. This factor partly

contributes the success of domestic manufacturers in Chinas mobile

phone market. The speed of the introduction of new products rise

represents the high competitive situation in this market. Therefore,

the technological development and the intense competitive

environment also contribute to the penetration of the mobile phone.


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4.4 Char ac te r is t ics o f Ch ina s Mob i le Phon e I ndu s t r y

4 .4 .1 H igh ly Techno logy Concent r a ted

Developing and improving technical skills and knowledge to respond

to the dynamic business environment are of vital importance to

manufacturing companies in high-tech industries (Jin and Zedtwitz,

2008). The mobile phone industry is no exception. Technology plays

an important role in the developing history of the mobile phone

industry, especially from a strategic perspective. Furthermore, in the

developing countries, governments stress the point in particular on

the grounds of its strategic role in competitive advantage (Lall, 1990).

The development and quick progress of underlying technologies in

Chinas mobile phone manufacturing industry are mainly transferred

or learned from foreign mobile phone manufacturers (Jin and

Zedtwitz, 2008).

In the case of telecommunication systems, technology has made

progress from 1G to 3G in nearly two decades, from analogue to

digital technology. The first generation (1G) technology is Total Access

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