ALLIANCE PATTERNS DURING INDUSTRY LIFE CYCLE EMERGENCE: THE CASE OF
ERICSSON AND NOKIA
John Rice
Senior Lecturer in Management
Central Queensland University
PO Box 1319
Gladstone Qld 4680
AUSTRALIA
[email protected]
Peter Galvin
Senior Lecturer
Graduate School of Business
Curtin University of Technology
PO BOX U1987
Perth Western Australia 6845
AUSTRALIA
[email protected]
ABSTRACT
Industry Life Cycles (ILCs) have been proposed as a means of analyzing the processes of
company entry and exit in competitive industries. This paper utilizes ILC approaches to better
understand the changing rationales for alliance formation for two large multination electronics
firms, Nokia and Ericsson. Through the use of alliance announcements by the firms, we find that
the rationale for alliance formation changes over the industry life cycle in response to changing
organizational needs and industry imperatives. We also find that the rapid emergence of
standards-based alliances has been a strategic response by firms and industries to the growing
complexity of information and communication technology systems and the costs involved in
ignoring the scale economies that standards-based alliances deliver.
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Keywords: Alliances, Life cycles, Competencies, Mobile Telecommunications.
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ALLIANCE PATTERNS DURING INDUSTRY LIFE CYCLE EMERGENCE: THE CASE OF
ERICSSON AND NOKIA
INTRODUCTION
Research relating to the study of industry life cycles (ILCs) has generally been focused upon
company survival throughout periods of industry evolution. Processes of “shakeout” are
generally examined as a common finding, and the reasons behind this rationalisation of
organisational participants is a common theme in the literature.
This paper takes a different slant on the role and nature of industry life cycle dynamics. We adopt
the industry life cycle of the mobile telecommunications terminal manufacturing industry as a
contextual background, and examine the manner in which two large and successful multinational
firms create and develop interorganisational alliances in their efforts to facilitate their strategic
and operational success.
Inherent in the paper is a focus on the changing rationale for alliance formation and development.
We explicitly address the changing nature of alliance arrangements and the operational and
resource-based organisational imperatives that alliances address. Links are thus developed
between the changing rationale for alliance formation and the changing industrial context of the
ILC. The paper thus seeks to create a nexus between evolutionary models of industry
development and theories relating to organisational alliance formation (from a Resource Based
View (RBV) and operational perspective).
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INDUSTRY LIFE CYCLE RESEARCH
Industry life cycle (ILC) models aim to integrate technological, firm and industry evolution in
terms of trajectories and outcomes that can be exogenously observed (Suárez and Utterback
1995; Klepper 2002). Inherent in the ILC approach is that some degree of accumulation occurs
with regards to embodied knowledge (in the form of capabilities and competencies), and thus a
link between industry evolution and organisational competency has developed (Lieberman and
Montgomery 1998).
This focus on knowledge accumulation creates a clear theoretical nexus with evolutionary
theories of firms and economies (see Nelson and Winter 1982). As such, ILCs can be seen as one
model of explanation of the way in which firm populations change, driven by market factors (for
example, the accumulation of manufacturing economies and diseconomies and the industrial
impacts of technological evolution).
While there have been numerous models proposed as to the form of ILCs and the number of
stages they contain (e.g. Schumpeter 1939; Hofer 1975; Abernathy and Utterbuck 1978;
Anderson and Zeithmal 1984; Hill and Jones 1998) there is a shared assumption of heightened
risk and uncertainty during early stages leading to more stable firm and market dynamics during
late stages. Industry life cycles are often studied in a quantitative empirical sense through an
analysis of population ecology models which, in turn, analyse firm establishment and mortality
(Klepper and Graddy 1990, Mazzucato 2002, Mazzucato and Geroski 2002) as a means of
gauging the stage of the industry life cycle under investigation.
The phases of an ILC generally conform to some variation of the “birth, growth, maturity and
decline” continuum, with decisions taken earlier by firms cementing their latter roles and success
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within the emergent industry. This occurs through the processes of accumulation of
organisational competencies on the one hand and sunk costs on the other.
For Klepper (1996) the stages of a life cycle of an industry provide a potential explanation for the
persistence of inter-temporal and inter-sectoral returns to scale. These differences emerge from
the fact that early industry stages are characterised by greater uncertainty and risk in investment
decisions, with the concomitant rewards of this state of uncertainty emerging in later stages of the
industry cycle as product markets and organisational competencies mature.
Klepper (2002), in testing this model, found that observed differences between firms within
industries and indeed industrial sectors can at least be partially attributed to the dynamically
increasing returns made available to firms and industries through technological change. Market
structure and operational technologies, he notes, co-evolve or are simultaneously determined. The
implications for management and policy makers under this scenario are manifest, with the
management of technological emergence (and its impacts on the firm) of key importance in the
establishment of a durable role within an industry population. ILC models thus have significant
implications for organisational technology strategies.
As ILC models also adopt a point of departure of dynamic, rather than static, industrial
environments, they present a key challenge to neoclassical models of economics and strategic
management. For example, they assume a key role for the accumulation of organisational
competencies, and they argue that firm scale and dominance are cyclical and often transitory and
they posit that the vagaries of technological uncertainty have a major role to play in the shaping
of organisational success. As such, managerial prerogative extends beyond the neo-classical
challenge of efficiency seeking to include actions within and between firms to manage these
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dynamic processes of exogenous technological change and endogenous organisational resource
development.
INDUSTRY LIFE CYCLES AND INTERORGANISATIONAL ALLIANCES
Most ILC theories acknowledge the primacy of technological change as the key driver of industry
evolution. Technology facilitates and constrains operational efficiencies and product level
innovations (Jovanovic and MacDonald 1994), and often provides the impetus for the emergence
of a dominant design (Utterback and Suárez 1993), with its latter impacts on industry makeup.
Pyka (2002) contends that factors exogenous to firms, though endogenous to technology based
society, are creating a strong impetus for the formation of informal networks – a precursor to
formalised knowledge alliances. In essence, he identifies the three drivers of technological
uncertainty, technological opportunity and spill-over appropriability as the rational drivers for
network aggregation. Such factors seem especially relevant in an economy driven by high
technology. In such a context, scale and scope were of secondary importance to issues such as
speed of innovation, information sharing and technological capacity across product and
application lines, across standards and within and between industries (D’Aveni 1994; Brown and
Eisenhardt 1997). By linking the formation of alliance precursors so closely to the processes of
technological emergence, Pyka (2002) makes a strong case for the need to study alliance
emergence over time in industries with changing and emergent technological factor markets.
These authors acknowledge that alliance arrangements play many roles in organisational
technological strategies. In terms of the exploration versus exploitation trade-off (c.f. March
1991), alliances can clearly allow for both the acquisition of new competencies and the better use
of existing competencies. One major way that firms can integrate the dual challenges relating to
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exogenous technological change and endogenous organisational competency development is
through alliances. Alliances and interfirm networks are increasingly seen as means to extend the
“knowledge boundaries of firms” (Howells et al., 2003). Within different ILC stages, alliances
can be driven by differing knowledge-strategy objectives. Hagedoorn (1993) contends that at the
earliest stages of an industry’s life cycle, firms seek to create alliances to facilitate technological
innovations, while at latter stages, alliances may aim to create diversified product offerings. Such
propositions are consistent with those of Freeman (1991) who notes the use of informal networks
between professionals as an important catalyst innovations created from spill-over effects within
an economy.
As such, the literature reflects that the rationale for alliance arrangements changes over time.
Early stages of industry life cycles, with their characteristic risks and uncertainties, create an
atmosphere where firms seek to mitigate this risk through knowledge acquisition and risk
sharing. Risk and uncertainty (as a driver of potential future super normal profits) have also been
shown by authors to create the impetus for mass entries and later departures by firms (Horvath,
Schivardi and Woywode 2001, Zeira 1998).
Another interpretation of alliances in these early stages is their role as “search processes”.
Alliances facilitate the sharing of tacit knowledge between firms and their employees (Dussuage,
Garrette and Mitchell 2000), allowing for the creation of a portfolio approach to new products
and competencies that may not be possible within a vertically integrated organisation. The early
RBV literature, perhaps in response to the focus on aggregates in the classical literature, focused
strongly on the makeup and dynamics of individual firms. Later research adopted a focus on
networks and their dynamics. These models reconceptualised the resource-based framework as a
contingency-based response to the potential benefits and inherent problems of heterogeneous firm
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resources (Das and Teng, 2000). By linking the internal capabilities of the firm to the outside
partners, organisational resources are freed to operate as a source of creative novelty and product
or service value (Hagedoorn and Schakenraad, 1994).
Later, alliances may act as a means of “shaking out” industry participants. Alliances that allow a
sharing of capital risk and rewards through equity sharing allow both for industry consolidation
to proceed and for the reduction of risks inherent in standalone strategies. These strategies may,
in turn, create the impetus for a reduction in the number of firms.
Elg (2000) posits a convincing combinative theory during this ILC phase, noting that firms are
attracted to alliances during industry consolidation for a number of reasons, including
transactional cost theory (efficiency seeking), network theory (knowledge seeking) and resource
dependency theory (knowledge and factor stock accumulation). As such, alliances in this midphase are expected to be less focused on risk aversion, and more focused on operational
efficiency and competency leveraging.
As products and technologies mature further, alliances can facilitate technological innovations by
the combinative sharing of new information and component level innovations, acting as a catalyst
for new product innovations (Freeman and Barley 1990). In terms of March’s dichotomy, such
processes both increase and deepen a firm’s competency portfolio, adding to a firm’s capacity to
extract value from its knowledge resources.
Within the middle phases of an ILC, alliances can help to mitigate the industry’s “growing
pains”. An increasingly common form of alliance in high technology industries that facilitate
industry growth and diversification are alliances based upon technological standards. These
standards-based alliances are an important means of moving an industry life cycle from its
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tumultuous early stages towards maturity through the creation of design rules, interoperability
conventions for products and services and a process for managing paradigmatic questions relating
to technological evolution. Problematic here is the multiplicity of standards that often
characterise early to mid stage industries. In such situations, the cruel reality of Arthurian returns
to scale (Arthur 1996) often drive super-normal returns for those who back successful approaches
early, with the concomitant costs of poor choice borne by those who back other approaches.
At the latter stages of an industry’s life cycle, alliances allow the entrance of late mover firms. By
acquiring the existing operational competencies of incumbent firms, late entrants can perform the
role of efficiency seeking and product refinement that define the concept of second mover
advantage. Alliances can also be seen to be an effective means of exit for unwilling incumbents
who wish to salvage some value from organisational sunk costs through the potential benefits of
alliance-based synergies (Dussuage et al. 2000, Dyer and Singh 1998).
EMPIRICAL RESEARCH IN INTERORGANISATIONAL ALLIANCES
There is a rich amount of empirical research in the area of interorganisational alliances,
employing various sources of data and units of analysis. Pioneering empirical investigations were
undertaken by Pfeffer and Nowak (1976), whose studies of alliance arrangements in the oil and
gas industry found that the main rationale for alliance formation was the facilitation of resource
exchanges between large firms. In a more contractual vein, Kogut (1988) found that alliances and
joint ventures were an effective way to minimise costs of economic hazards in transactions.
Notable empirical work in alliance arrangements has been undertaken by Hagedoorn and
colleagues from the MERIT research group in the Netherlands (Hagedoorn 1993, Hagedoorn and
Schakenraad 1994). Using a large database compiled for the purpose of alliance investigation,
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these authors found that while sectoral differences in alliance arrangements are evident, there is
some commonality in alliance rationales in that they generally exist to facilitate the exchange of
some form of knowledge resource or market influence (in the form of marketing alliances, joint
production arrangements or research agreements). Research-based alliances, they found, were
experiencing the greatest degree of growth and were becoming of central strategic importance for
firms, especially those in high technology industries.
One evident weakness in such research relates to the empirical material employed. Alliance
research that employs these large databases as the key element of empirical input report
secondary data in abstracted form (i.e. the primary source of data is published information in the
relevant media). Clearly, while providing some strong guidance as to the direction and extent of
alliance formation, such reporting does not provide longitudinal data on alliance development,
nor does it provide information on the level of importance of the alliance in strategic and
operational terms for the firms involved.
In response to such limitations, there has been a growth in the use of case-based research on
alliance arrangements and other narrative supplementation of quantitative studies. Notable
examples of such research include Collinson (1999), Chesborough and Teece (1996), Doz (1996)
and Sankar et al. (1995) and Mowery et al. (1996). This research has tended to focus on
successful and unsuccessful attributes of alliances, motivations for alliance formation and
governance structures of alliance arrangements. In general terms, the unit of analysis has been
one or a small number of alliances.
EMPIRICAL APPROACH AND METHOD
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This paper draws upon a range of empirical sources to discuss the alliance arrangements of two
Nordic multinational firms, Nokia and Ericsson. The major source of information is the SDC
Platinum Database, a commercially available source of business information provided by
Thomson Financial. This database compiles, among other things, information on alliances
announced within business and industry literature. This database has been supplemented by any
alliance announcements provided by the two firms on their respective world wide web sites,
where full histories of company press releases are maintained. Where these announcements were
duplicated by both sources, duplicates were removed. Where records were incomplete, the source
material for the database (the Lexis Nexis business information source) was reviewed to ensure
sufficient information for the categorisation of the alliances was afforded. In total, 207 separate
alliances announced by the two firms have thus been reviewed
The firms Nokia and Ericsson, and their industry (telecommunications, with a shared focus on
mobile telephony) were chosen as useful cases for the discussion of alliance arrangement
developments during ILCs two reasons.
First, the mobile telecommunications industry provides a valuable example of an industry
moving from an early stage of an ILC to maturity. According to figures released by the
International Telecommunications Union (ITU 2003), subscribers to mobile services globally
increased from 16 million in 1991 to 1,329 million in 2003. To service this growth in subscribers,
the global industry that produces both terminals (handsets) and network equipment has emerged
from a small section of the telecommunications equipment industry to a large and dynamic sector
in its own right. The industry itself has shown signs, within this short period, of growth, shakeout
and decline. While many new entrants entered the industry during the mid-1990s, the late 1990s
saw many of the minor European players exit production either through sale or closure (notably
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Philips, Bosch and Dancall) and the entrance of new, lost-cost manufacturers in China and
innovative producers in Korea and elsewhere.
Secondly, Nokia and Ericsson, based respectively in Finland and Sweden, were chosen as
suitable cases for discussion of alliance arrangements due their important role in the mobile
telecommunications industry as suppliers of both terminals and network infrastructure throughout
the 1990s (ITU 1999) and their shared geographical and cultural contexts (with concomitant
influences on alliance behaviour (Mowery and Teece 1993; Bruner and Spekman 1998)).
The period examined here provides a useful window for the examination of an evolving ILC. The
1990s marked two distinct technological discontinuities in the industry, namely the decline of
analogue equipment production and the rise of first generation digital services and equipment in
the first two years and the rapid development of technologies and applications required for third
generation mobile telephony in the latter few years of the decade. Throughout the middle years,
mobile telephony established itself as a mass-market consumer industry. These changes
facilitated a rapidly maturing industry, with a range of new consumer applications emerging that
were facilitated by technological innovation. In the latter years under examination, the
penetration of digital second generation terminals increased, though firms began to look towards
necessary research for the next iteration of technology – namely third generation digital systems.
ALLIANCE ACTIVITY OF NOKIA AND ERICSSON
Ericsson started the period under investigation as a much larger firm than Nokia in terms of sales,
profits and staff. As such, Ericsson could be expected to produce many more alliances than
Nokia, and this proved to be the case, especially in the early years examined here.
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Share of Alliances Announced
Nokia
Ericsson
20
Total 10
0
90
Nokia
91
92
93
94
95
96
97
98
99
Year
A convergence of alliance announcements can be observed in the latter years of the above graph.
This trend, where Nokia increased its alliance activity vis-à-vis its competitor, was the result of
many changes in firm strategies relating to products and also changing relative firm size, the
relative economic success of the two firms and other technology strategies that will be discussed
later in this paper.
Ericsson as a firm began the 1990s with a much broader set of products and applications in IT&T
than Nokia. Ericsson maintains a large presence in fixed line telecommunications network
equipment and premises equipment (terminals and PABX systems). Nokia, on the other hand, has
become increasingly focused on the mobile terminal segment of this industry. As such, Nokia’s
alliances have supported this narrowing strategic focus, while Ericsson has tended to create
alliances in many areas of IT&T.
Categorisation of Alliances
In total, 207 alliances were examined for this paper. While many of these alliances had specific
transactional aims, others were general in nature and were multifaceted in their strategic
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rationale. In such cases, a judgement was made as to which category best described the aims and
objectives of the alliance in question.
The alliances were then categorised under the following types for ease of analysis:
Distribution – an alliance arrangement that exists principally for the OEM or vendor firm to sell
or distribute products and services to the partner or recipient firm. In many cases, these alliances
are simple contractual arrangements, though in others there is significant value added in the
creation of specialised services or products. Literature on supply chains and marketing channels
provides a discussion of the rationale of such alliance arrangements.
Production – an alliance arrangement that allows the principal firm to physically produce
products in partnership with the partner firm. In some cases, these arrangements were required by
the national laws of the nations involved.
The strategic rationales for these first two alliance types fit loosely into the transaction cost
explanation for alliance formation (Williamson 1991; Gulati and Singh 1998). In essence, these
alliances aim to create sustainable economic rents in operational areas of the firm’s activities.
The rationales for the next two alliance types fit more closely with the RBV explanations of
alliances discussed in the literature review. In essence, the alliances below are driven by a need to
garner capabilities and formalised knowledge (patents rights and other IP) for the development of
new knowledge or products and services. The first two types – research and development and
technology acquisition for product development – differ in their level of focus on new knowledge
creation per se, and new knowledge directly required for the creation of an actual product or
service. While all products embody knowledge to some degree, some alliances aim to create
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generic or specific knowledge as an intermediate input into long-chain development projects,
while other alliances aim to produce knowledge that is specifically required in new products or
services.
Research and Development – an alliance arrangement that exists to facilitate pure or applied
research of relevance to the partners, though with no direct and immediate commercial
application in the creation of specific products or services. Such alliances are often formed
between firms and government-sponsored organisations who undertake pure or basic applied
research which may later be used by industry.
Technology Acquisition for Product Development – such alliance arrangements exist to
facilitate the exchange of tacit capabilities and competencies through formal intellectual property
rights (licensing), informal knowledge exchanges and provision of operational expertise. The
strategic rationale for these alliances for the recipient firm is the creation of products or services
in the short term (0-2 years), rather than the development of new knowledge that may create
products or services in the medium to long term. These alliance arrangements may also
encompass the rights to distribute information content.
Standards Promotion – the final alliance type discussed, that relating to standards creation and
promotion, has received much greater interest in recent years. In essence, the standards required
to promote user interoperability in electronic networks are driven by alliance-based standards.
Even proprietary standards like those embodied in the “Wintel” system create the impetus for
alliance creation. This drive to alliance creation is even more important in open standards
networks, like the Bluetooth consortium. Technical standards exist to facilitate the
interoperability of electronic network devices. These alliance arrangements exist to allow firms to
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support the creation of such standards. Alliance arrangement may be limited to a small number of
firms, or may be broad and multilateral in nature. Standards are promoted to reduce systemic risk
from application incompatibilities, and provide positive network externalities for users and
producers.
Overall Alliance Trends
As has been noted, a total of 207 alliance announcements have been analysed for this research.
The number of alliances announced varied considerably over the time series, as did the relative
share of alliance announcements by the two firms.
Share of Alliances Announced
Nokia
Ericsson
30
25
20
Total 15
10
5
0
90
91
92
93
94
95
96
97
98
99
Year
In general, Nokia shows a positive trend in developing more alliances over the years examined,
while Ericsson’s number of announcements varied, though showed no upward trend generally. In
total, Ericsson was far more active in alliance formation (132 as compared to 75), though this
differential was more evident in the early years examined here than during the later years.
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The following graph illustrates the alliance creation behaviour of both Nokia and Ericsson
(combined) between 1990 and 1999. Alliance announcements have been examined and coded
according to the five type taxonomy presented above.
Alliance Activity of Both Firms (by category)
Distribution
Production
Tech Acq
Standards
R&D
30
25
20
Number of
15
Alliances
10
5
0
99
98
97
96
95
94
93
92
91
90
Year
The graph shows many interesting trends. Where there is some constancy of alliance formation
activity by firms, it is mostly in the area of knowledge-based alliance arrangements. This
constancy is better illustrated in the following graph, where the distribution and production
alliances have been aggregated into “contractual” alliances while the research, development and
knowledge acquisition alliances have been aggregated into a “knowledge” grouping. It is
acknowledged that many “knowledge” alliances have a formal and contractual element, though
the reference to contracts is aligned to the Coasian notion (Coase 1937) of the firm as a nexus of
contracts, with operational and physical assets as the area of focus.
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Grouped Alliance Activity of Both Firms
Contractual
Knowledge
Standards
30
25
20
Number of
15
Alliances
10
5
0
99
98
97
96
95
94
93
92
91
90
Year
As can been seen, the level of contractual alliance formation has been highly variable over the
period examined, while the level of knowledge creation and acquisition alliances have been
relatively stable in number, without the large fluctuations evident in the other two groups of
alliance types.
This trend is perhaps better illustrated in the following graph, where the variation in the share of
all alliances over the period being examined is highlighted.
Alliance Arrangements Share for Both Firms
Contractual
Know ledge
Standards
Share of Total
1.2
1
0.8
0.6
0.4
0.2
0
99
98
97
96
95
94
93
92
91
90
Year
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The other notable occurrence evident in the graph is the degree of emergence of standards-based
alliances in 1998 and 1999. The reasons for these alliances are discussed later in this paper,
though their growing importance is evident from the data above.
Ericsson’s Alliance Activities
Looking to the two firms and their specific alliance creation behaviour, some other trends become
evident. The following graphs present the alliance creation behaviour of Ericsson and Nokia
separately, both by category and grouped into “contractual”, “knowledge” and “standards” as per
above.
Ericsson Alliance Activity
Distribution
Production
Tech Acq
Standards
R&D
20
15
Number of
10
Alliances
5
0
99
98
97
96
95
94
93
92
91
90
Year
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Grouped Alliance Activity of Ericsson
Knowledge
Standards
93
95
Contractual
20
15
Number of
10
Alliances
5
0
99
98
97
96
94
92
91
90
Year
These graphs also illustrate the variation of focus on contractual alliances throughout the period.
In the mid-1990s these forms of alliances accounted for more than half of those announced by
Ericsson, with this focus declining in the last years of the decade examined here. The more
detailed of the graphs illustrates that much of the variation in “contractual” alliance formation
was due to variation in the announcement of distribution alliances. These alliances were heavily
influenced by the rollout of GSM networks in Eastern Europe and Asia in the early-to mid 1990s,
a process that had been all but completed by the latter years of the decade.
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Nokia’s Alliance Activities
Nokia Alliance Activity
Distribution
Production
Tech Acq
Standards
R&D
12
10
8
Number of
Alliances
6
4
2
0
97
98
99
97
98
99
96
95
94
93
92
91
90
Year
Grouped Alliance Activity of Nokia
Knowledge
Standards
93
95
Contractual
12
10
Number of
Alliances
8
6
4
2
0
96
94
92
91
90
Year
Other important trends become evident in the tables illustrating Nokia’s alliance activities. While
the firm shared Ericsson’s variation in the announcement of distribution alliances, they
maintained a reasonably steady stream of announcements of new production alliances. Many of
these alliances were in developing nations in Asia and Eastern Europe, where Nokia sought to
locate production facilities as demand for their products increased rapidly throughout the decade.
The other clear trend is the focus that Nokia developed in the last two years examined here on
standards-based alliances. Some of the reasons for this focus the focus on non-proprietary and
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open standards as a means for product development and knowledge exchange clearly played a
central role in Nokia’s alliance and technology strategy from 1998 to 1999.
DISCUSSION
Earlier in this paper, a review was undertaken of the extant literature relating to alliance
arrangements during industry life cycle evolution. While agreement among authors was not
evident, there was some commonality of view that the risks inherent in early life cycle
participation may encourage firms to create alliances and networks to share and or mitigate risks
involved in standalone strategies (Klepper 1996; Horvath, Schivardi and Woywode 2001; Zeira
1998). Hagedoorn (1993) posited that early-stage alliances are motivated by the search for new
knowledge to facilitate innovations, and this theme of knowledge acquisition found resonance
with the works of Pyka (2002) and Dussuage, Garrette and Mitchell (2000).
There was somewhat more conjecture evident as to the nature and rationale of alliances during
the mid-phases of an industry life cycle. Klepper (2002) notes the impact of dynamically
increasing returns to scale, and the impact that this effect may have on firm conglomeration and
exit.
Alliances during this phase were seen to facilitate some combination of operational
efficiency improvement and application research and development capability (Elg 2000).
The literature was somewhat thinner on alliance motivations during industry maturity phase of an
ILC. In some respects, however, mature industries provide the empirical context for many of the
major empirical investigations of alliances (Hagedoorn and Schakenraad, 1994; Das and Teng
2003). In essence, it seems that alliance motivations during the mature phase of an industry life
cycle are more determined by factors endogenous to the firm and industry than any overarching
developmental issue evident elsewhere in an industry life cycle (Das and Teng 2001). Such
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motivations incorporate late-stage ILC risk brought about by late entrants, the need to participate
in the emergence of paradigmatic technological designs (Abernathy and Utterback 1978), the
need to innovate and create new applications (Deeds and Rothaermel 2002) and the need to
purview innovative developments beyond immediate firm and industry boundaries, that are of
seminal importance to application development (Brusoni, Prencipe and Pavitt 2001).
In the context of this literature, Nokia’s alliance formation policies follow expected patterns, to a
certain extent. The alliances that Nokia developed during the early years of the 1990s emerged to
support the dual challenges of manufacturing cost reduction and technology acquisition.
Exemplars of this include the alliance with Kablo Decin Czech Cables and Svit SA (also from the
Czech Republic), an early example of alliance formation with newly privatised firms from
Eastern Europe that Nokia later pursued more actively in the following years. Many of the other
alliances identified in this research, were categorised as knowledge sharing alliances. An
international exemplar includes the alliance between Nokia Mobira and Qualcomm in 1990. In
many respects, the direct aim of this alliance was the acquisition of Qualcomm IPR to facilitate
access for Nokia Mobira into the US market, though a clear flow-on effect was the acquisition of
valuable tacit knowledge in the CDMA area.
Nokia created significant numbers of contractual alliances during this phase also, and the
literature would indicate the emergence of these later in a product life cycle, once the core firms
had refined manufacturing operational processes and were ready to pursue cost-based
efficiencies. Nonetheless, the peculiar historical opportunities of privatisations in eastern Europe
provided Nokia and Ericsson with opportunities to quickly acquire valuable factory facilities in
East Germany, Hungary and the Czech Republic. Also, in the first instance the Nordic firms
utilised these new assets to produce lines other than mobile telephones (for instance, Nokia
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continued production of TV sets at its East German factory) though when production of handsets
increased in the mid 1990s, Nokia and Ericsson quickly added to their throughput in these new
plants.
Less evident is the use of alliances to negate risk, per se. Clearly the munificence evident in a
rapidly growing industry intrinsically negated some of this risk, though alliance arrangements
during the early phases of the ILC seemed to be expansive rather than defensive vis-à-vis risk,
which is a rather different scenario than a reader of the extant literature may expect. In some
ways, alliance rationales were not reflective of the academic literature that often argues that
alliances early in a product life cycle are generally aimed at knowledge and risk sharing, while in
actuality the types and nature of the alliances was more mixed. In essence, the larger number of
contractual and especially production alliances can be seen as a response of the two firms to the
potential and new business realities of Asia and eastern Europe, with the reward component of
the risk-reward tradeoff more evident in motivating the expansion of alliance arrangements.
Through these years that marked the early industry stage, Ericsson was far more restricted by its
own competence endowment in the alliances that it sought to develop. In previous years, Ericsson
had been mainly a fixed line producer, with strong internal competencies in network switching
utilising PABX systems. Ericsson was a world leader in the development of network solutions
and the firm and its management saw the way forward as developing these competencies where
necessary, with an extension of mobile and cellular competencies where possible through alliance
formation.
Many of Ericsson’s early alliance efforts were distracted by the firm’s commitment to the failing
and ill-conceived Infocoms division. Indicative of these alliances are many of those reported in
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the data examined, including extensive alliances with NTT of Japan and Motorola of the US. By
1993, the Infocom division was becoming marginalised within the firm as it sought to promote
developments in mobile telecommunications. As such, much of the early alliance activity of
Ericsson was somewhat fruitless.
Another marked difference between Nokia and Ericsson was the different level of focus on
alliance arrangements for production. As has been shown, Nokia’s focus of alliances was
reasonably well divided between operational alliances and knowledge acquisition alliances
during the period 1991-92. Ericsson, on the other hand, was a late-starter in this “outsourcing” of
many of the operational processes of production and design, though such alliances became the
dominant variety for Ericsson between 1993 and 1995.
The literature argues that mid-stage alliances have elements of both efficiency-seeking and
knowledge acquisition, and for both firms, such strategic rationales were evident in their alliance
creation processes. Nokia were the first firm to see GSM telephones as potentially mass-market
products and many of their alliance arrangements (with Eastern European manufacturers on the
one hand, and with Sonera of Finland, on the other) supported this scenario. For Nokia, the dual
challenges of unit cost reduction and marker growth required a dualism of alliance arrangement
to create new, market-facing technologies at a low cost.
Ericsson, on the other hand, was imbued with a strong technical and engineering culture and
many of their alliances during the early phase of the industry’s development supported the
development of knowledge for its own sake and also for the purposes of extending links in
complementary areas of research within the firm.
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While the literature indicates that alliance arrangements during the middle stages of an industry’s
life cycle can have mixed aims, they are often expected to be directed towards the search for
operational efficiencies and new product development. As has been discussed, both firms pursued
many more “contractual” alliances during 1993-1995 than they had previously. While the earlier
alliances could often be characterised as “exploratory” in nature (seeking new operational
knowledge and providing initial access to new sites in Asia and Eastern Europe), these
contractual alliances tended to focus on operational efficiency and exploitation (not necessarily in
a negative manner) of the operational and knowledge competencies of other firms.
Other alliance arrangements of the two firms during the period of GSM consolidation during
1993-1996 were related to distribution. In many respects, these arrangements were fairly simple
customer-supplier arrangements, though many of the customer firms sought to lock-in the
expertise and knowledge of the vendor firms through complex financial and knowledge-sharing
strategies.
These alliance arrangements could thus be seen as a strategic response of customer firms to the
deepening complexity of mobile telecommunications systems. The capacity of Ericsson, and to a
lesser degree Nokia, to provide “turnkey” solutions to the firms was a source of significant
succour to operator managers who were committing to large-scale investments in emerging
technologies. This situation was exacerbated by the relative lack of deep competencies in the
operator firms relating to the design and operation of a mobile network.
The deepening of the presence of the firms in China is also notable during this period. Production
and distribution alliances were signed with various firms throughout China. Such alliances were a
response both to the enormous perceived potential of the Chinese market, and also the capacity of
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the Chinese economy to produce electronics products in large quantities and at relatively low
costs.
Industry and technological maturity in mobile telecommunications (as opposed to industries
without such evident technological iterations and redundancies) is often coincidental with periods
of technological and market foment. In many respects, the move from GSM to 3G marked a
period of discontinuous change and great uncertainty for the industry, and the impacts of this
change on alliance behaviour are notable.
The literature argues that alliances during late-stages of an industry life cycle aim to facilitate
technological innovations through better utilisation of organisational competencies within
complex product networks (Dussauage et al. 2000). Alliance arrangements, it is argued, also
facilitate the entrance of late movers, who in turn seek to offer new product or service
applications or offer generic products at lower costs than incumbent competitors. As such
alliance behaviour of industry firms should illustrate this move to contractual alliances, either as a
means of influencing the proliferation of low-cost competitors or as a means of new revenue
generation through technology licensing by firms like Nokia and Ericsson.
The evidence presents a somewhat different picture, with the emergence of knowledge and
standards alliances most evident, and the rapid decline of transactional and operational alliances.
Clearly, one of the major drivers of divergence from theory was the emergence of the next
generation of mobile telecommunications, which coloured the types of alliances formed both for
second and third generation telecommunications. The later years of the 1990s also saw what (in
hindsight) was a speculative bubble of investment in the telecommunications industry, with this
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bubble creating a massive ramp-up in investment in knowledge acquisition and creation,
especially that required for the nascent third generation mobile telecommunications standard.
Thus while technological discontinuities between first and second generation systems saw the
emergence of alliances relating to technology acquisition and operational areas, the main area of
alliance proliferation during the period of change from second to third generation systems was in
the form of standards-based alliance formation.
The increasing importance of standards based alliances during the time investigated for the
mature period of the industry life cycle (1996-2000) provides a useful case in point to this
phenomenon of alliance formation for industry participation. These alliance arrangements
facilitated both the flow of technical knowledge and information between partners, and also
reduced the systemic risk caused by application incompatibility – a risk that was further
exacerbated by the growth of technological complexity in the systems themselves. These
standards-based alliances tended to be inclusive of members from a variety of sections of the
mobile telecommunications industry. In some respects, they provided a bridge between the often
competing constituencies of the industry – service providers and equipment manufacturers.
CONCLUSIONS
Overall, data presented above illustrates variation in alliance announcements that mirrored
broader trends within the firms and the industry. These trends relate to outsourcing of production,
technological development and acquisition and standards and protocol development.
The literature relating to alliances proposes a number of motivations for alliance formation at the
early stages of an ILC, not least the inherent risk aversion of management and the potential for
alliances to share paradigmatic risk between industry participants. In the material examined here,
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contrary to what would be expected as per the literature, there is little evidence of firms pursuing
alliances for risk reduction purposes early in the life cycle. We propose that an explanation for
this outcome was the strong growth expected within the industry during its early to middle
phases, and a concomitant preference to capability build up through alliance arrangements as a
response to very buoyant factor markets (especially for knowledge and technology) that made the
internal development of these resources difficult.
This conclusion accentuates the environmental embededness of alliance strategies in this case. In
many respects, this is not unexpected as alliances are principally defined as a means of
environmental interaction, though the nature and level of munificence of organisational
environments, and especially their factor and product markets, are often discussed only
peripherally in the extant alliance literature.
There is clear evidence of the use of alliance arrangements during the middle-period examined
here as means of increasing production efficiency during rapid periods of growth. Contractual
alliances aimed both at outsourcing production and also acquiring operational knowledge
resources were most prevalent during the mid-stage period of the time under investigation. Such
finding were consistent with both the alliance and the ILC literature, both of which emphasised
the potential efficiency effects of outsourcing and vertical integration of supply chains as a means
of reducing operational costs of production and distribution.
Knowledge-based alliances were most common during the early and latter periods of the ILC,
periods of industry perturbation with heightened uncertainty relating to future developmental
technological decisions present. There is evidence of a relative increase in the importance of
knowledge and standards alliances during the latter years examined, at the expense of operational
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and production alliances. As has been discussed, the unusual industry climate of massive asset
value growth during the late 1990s may have coloured this trend, though the complexity of
knowledge requirements for continuing firms (those not exiting the industry) would also have
played a part in increasing knowledge and standards alliance formation for firms who wished to
continue involvement in the industry.
Overall, the alliance arrangements of the firms examined here are strongly related to both the
endogenous challenges of capability development and the external challenges relating to systemic
technological change and changing factor markets. Alliances allowed firms to both acquire new
technological capabilities and also participate in controlling the emergence of new technological
standards.
The changing nature of the rationale for alliance formation can thus be attributed, at least in part,
to the complexification of mobile telecommunications products. As the requisite capabilities for
participation in mobile telecommunications has increased, a degree of vertical and horizontal
disintegration of the industry has occurred. Where firms have been able to internalise all of the
capabilities of design, production and distribution in the past, the changing nature of the product
has made this impossible.
A further driver of alliance formation to emerge from this situation has been the loss of authority
by individual firms within the industry, and the emergence of standards based alliances as a
means of creating a fair and responsive mechanism for decision making relating to technological
emergence. The existence of numerous alliances for the purposes of creating industry wide
product architectures has not been explicitly covered in traditional alliance literature (e.g. Gulati
and Singh 1998, Das and Tang 2000) and this finding represents a significant finding in relation
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to alliance characteristics at different stages of ILCs. Furthermore, this trend could be expected to
continue (and increase in importance) as technologies become more interconnected and complex.
As such, alliances will emerge as essential governance mechanisms in high technology industries
in future to complement their role in confronting both operational and knowledge-based
challenges of incumbent firms.
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