Life cycles, firm strategies & industrial evolution

7/30/2019 Life cycles, firm strategies & industrial evolution

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SPRU Masters - Spring 2003managing innovation in complex products and systems

Andy Davies

Life cycles, firm strategies &

industrial evolution


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Explanations of innovation and industrialevolution

Product life cycle - industries evolve from birth to

maturity (typical of mass production industries) Different pattern in CoPS

Case study of mobile communications system

Ericsson's strategies

Overview


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(page xvii, James Utterback, 1994)

Fluid Phase Transitional Specific Phase

Phase

Product innovation

Process innovation

Product life cycle (PLC)

Rate ofMajor

Innovation

Dominant design


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'The fundamental architecture of the automobilewas achieved by roughly 1925 - an enclosed steelbody mounted on a chassis, powered by an

internal combustion engine. And by the end of the1930s, improvement in product characteristics hadvirtually ceased' Mowery and Rosenberg, p57, Paths of Innovation, 1998)

'The auto industry can be described astechnologically stagnant in terms of its product.Cars are not fundamentally different from whatthey were in 1946' (White, p258, 1971)

PLC example


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Periodic waves of radical innovation

New firms invade the traditional industry

Technical change is 'competence destroying'

Industry shakeout Established firms develop the capabilities and

learning to bridge discontinuities

Discontinuities explain consumer goods:

decline of US and EU

rise of East Asian suppliers

Technological discontinuities


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'This situation of limited product variety andinnovation began to change during the1970sBy the late 1970s, leading Japanese

automobile firms such as Toyota and Hondahad perfected new techniques for productionorganisation and product development thatmade possible the creation and manufacture

of a broader variety of higher-quality productsthan were available from US producers' Mowery and Rosenberg, p57-8, Paths of Innovation, 1998)

Example of a discontinuity


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Explains mass production industries

Influenced how the West should respond to EastAsian challenge (e.g. cars, PC)

Critics of life-cycle models Problems with biological analogies: 'development

of firms does not proceed according to the same'grim' laws as living organisms' (Penrose, 1952)

Inter-industry & sectoral differences in innovation(Pavitt, 1984)

PLC - strengths & weaknesses


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PLC doesn't apply to CoPS:

'In other industries (e.g., military and commercialaircraft, large turbine generators), automatedmass production is never achieved and mostinnovation is product-oriented' (Michael Porter,p194, Competitive Advantage: 1985)

'high volume, process intensive stages of the

product life cycle may never occurThuscompetitive strategies are likely to centre uponthe design and development 'stages' of theconventional product life cycle' (Miller and

Hobday et al, 1995)

PLC in CoPS?


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No dominant design in the conventionalsense

Long-term stability at the systemsintegrator level - despite technologicaldiscontinuities

Technical change is not necessarily

competence destroying

Innovation in CoPS


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Mobile handsets (consumer goods) An assembly designed, mass produced &

marketed in high-volume to the final consumer

Mobile networks (CoPS)

A system designed, implemented and configuredfor mobile operators

Subsystems: radio base stations, base stationcontrollers, switches, operationg systems, databases

Case of mobile communications


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Base

station

Base station

Controller (BSC)

Mobile switching

centre (MSC)

Mobile switching

centre (MSC)

Subscriber data base

Roaming data base

Base station

Controller (BSC)

Base

station

Base

station

Base

station

Base

station

Base

station

Mobile communications system


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Switching

subsystem

Base station

controller

Radio base

station

Mobile

handset

Operating

subsystem

Products Product ion Users/markets

Mass produced

High volume

CoPS unit, small batch,large batchproduction ofsubsystems &components

Project-baseddesign &implementation ofsystems

Consumer

goods

Mass marketingto final

consumer

Business-to-

business

Business usersheavily involvedin design andspecifications

Firms

Ericsson

Motorola

Lucent T.

Nortel

NEC

Siemens

Nokia

Alcatel

Samsung

Qualcomm

Nokia

Sony/Ericsson

Motorola

Samsung, etc.


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European suppliersmust reach levels of efficiency in

production achieved by Asian manufacturers of high-volume consumer goods. The associated dynamics of

manufacturing design and marketing of products withshort life-cycles must also be mastered (CEC, GreenPaper, 1994)

Established suppliers - market share (2001) Nokia (35%), Motorola (14%) and Ericsson (7.5%)

New competition from East Asia Samsung (6.6%), Panasonic (4.6%), NEC (3.3%)

Mobile handsets - PLC dynamics


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1G (1981)

Analogue

analogue transmission between handset & RBS

FDMA - divides channels by range offrequencies

2G (1992)

Digital

narrowband voice & low-speed data 9.6kbps

digital transmission TDMA (slice spectrum intotime slots) & CDMA (unique codes for eachmessage)

3G (2001)Wide-band

mix of circuit & IP packet-switching overcomes 2g circuit-switch bottleneck (high-speed data)

high-capacity (2mbps) services radio accessbased on CDMA

Generations of mobile systems


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1981-83 1992-5 2001

NMT GSM W-CDMA

CDMA CDMA2000

AMPS D-AMPS

1G 2G 3G

Significant technological evolution

Limited technological evolution

Technical standards


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New system generation phaseArchitectural phase

Rate of

Major

Innovation

Archictectural

innovation

R&D efforts

Development of

standards

Component & systemic innovation

Product design and manufacture

Project development and

implementation

Life cycle dynamics


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Vertically-integrated telecomsmanufacturer (fixed and mobile networks)

Delivered world's first mobile system in

1981 World ranking in 2001

No. 1 supplier of mobile networks

No. 3 supplier of mobile handsets

Ericsson


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Strategic focus - 1970s & 1980s Traditional focus on fixed telephony (AXE digital switch)

Mobile unit - small, autonomous, entrepreneurial, but marginal

Early 1980s - Ericsson becomes a provider of completeintegrated systems in mobile telephony 'whole package' of switches, base stations and cell plannning

Environment Benefits from rapid adoption of NMT standard

Small home market encourages expansion abroad (USA 1983)

Quick to take advantage of liberalised markets (e.g. Vodafone

UK 1983)

Ericsson - 1G systems


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Mobile systems become strategic In 1994 Radio Communications over 50% of Ericsson's sales &

30% of the workforce

In 1997 Radio Communications 70% of total sales

Expanding capabilities Only supplier to cover all technical standards for 1G and 2G

systems (e.g. AMPS, CDMA)

Environment EU selects GSM standard - based on NMT features

GSM creates large market for Ericssons products

GSM system - de facto world standard (mid-1990s)



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Supplier NorthAmerica

Europe Asia/M.East

Other Total MarketShare

%

Ericsson 6,242,000 6,696,800 2,203,300 1,967,500 17,109,600 42

Motorola 4,255,000 1,669,000 1,538,900 347,200 7,810,100 19

Lucent T 6,660,000 0 731,300 45,700 7,437,000 18

Nortel 2,172,000 303,900 0 331,000 2,806,900 7

NEC 0 0 2,059,600 198,000 2,257,600 5

Siemens 0 1,354,900 0 48,000 1,403,500 3

Nokia 0 781,600 380,200 16,700 1,178,500 3

Alcatel 0 475,500 600 2,500 478,600 1

Other

suppliers

555,700 74,000 1,000 16,200 646,900 2

The world's leading supplier 1994


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The strategic focus narrows further Pulls out of lower-value added manufacturing (handsets)

Focuses on systems integration and services

Capabilities Ericsson/Nokia support W-CDMA standard W-CDMA incorporates new interface - backwards compatible

with core GSM infrastructure

Environment Ericsson involved with NTT DoCoMo consortium to develop W-

CDMA standard

Experimental W-CDMA system in 1998; standard in Japan by1999; Ist commercial introduction in Japan November 2001



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Large losses in handsets ($1.6bn loss in 2000)

Mobile phones - over-engineered and poor design

Handset division slow to recognise market trends

'They are a bunch of engineers who couldn't careless what the phone looks like' Financial Times

Handset Division

manufacture outsourced to Flextronics

Design - alliance with Sony (20 April 2001) toprovide consumer electronics expertise

Ericsson's weakness - mass production


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Mobile networks - 70% sales (2000)

highest R&D effort of system suppliers

only supplier to cover all technical standards

first supplier to introduce 1G, 2G & 3G strategic partnerships & acquisitions to fill gaps in

capabilities (e.g. Qualcomm for CDMA)

Strengths Systems integration, project managment and

solutions (e.g. set up Ericsson Global Services)

Ericsson's strength - CoPS


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Innovation in CoPS industries

Doesn't follow product life cycle dynamics

Stability at systems integrator level

Core capabilities in systems integration and projectmanagement

Other examples of long-term stability

Railways (Alstom, Siemens and Bombardier)

Commercial airliners (Boeing vs. Airbus)

Fixed telecoms (traditional suppliers - Nortel,Siemens, Ericsson - co-exist with new IP-basedentrants e.g. Cisco and Ciena)

Conclusions

Life cycles, firm strategies & industrial evolution

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