Bachelor Thesis
Organization & Strategy
Propensity to innovate on the
mobile telecommunications market
Student: Bram Konings
Student nr: 70.16.06
Professor: Dr. Hennessey
Date: 06/09/2010
Word Count: 7430
Innovation in the mobile phone industry
Preface
This bachelor thesis intends to give an illustrated view on the different perspectives of
the relationship between entry time and the propensity to innovate with regard to the
Industry Life Cycle. While there are several libraries filled with books and articles on
entry time and propensity to innovate, new entrants on the highly technological and
competitive markets tend to show different patterns on innovative behavior than was
assumed in earlier literature. This thesis tries to answer several questions regarding the
earlier mentioned topics, in order to find new, value-adding insights. First of all, I would
like to thank Dr. Hennessey for giving constructive criticism on my thesis, which helped
me improve this thesis on several points. I would also like to thank my colleagues that
Hoofdstuk: 1.1 Problem Indication
participated in the work-group, for their visions, insights and time. Have fun reading!
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Innovation in the mobile phone industry
Management Summary
This article deals with the question whether there is a difference in innovative patterns
(focus: propensity to innovate) of market entrants that enter on different entry times.
The difference in entry times causes market entrants to enter in different stages of the
Industry Life Cycle. Numerous research has been done in the past regarding innovation
on the Industry Life Cycle, but the new, developing markets (highly technological and
competitive) has different innovative patterns. The theories will be accompanied with
examples from the mobile telecommunications industry. Research on the Industry Life
Cycle and on patterns of innovative behavior has been collected and the different
theories are explained on the next pages. This article shows different limitations and
some ‘gaps’ in the literature that might require more research regarding the propensity
Hoofdstuk: 1.1 Problem Indication
to innovate of market entrants on highly and technologically competitive industries.
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Innovation in the mobile phone industry
Table of Contents
Preface ............................................................................................................................................. 3
Management Summary ............................................................................................................. 4
Chapter 1 ........................................................................................................................................ 6
1.1 Problem Indication................................................................................................. 6
1.2 Problem statement ................................................................................................. 7
1.3 Research Questions ................................................................................................ 8
1.4 Relevance ................................................................................................................ 9
1.5 Research Design and data collection .................................................................... 9
1.6 Graphical Framework .......................................................................................... 10
1.7 Variables explained .............................................................................................. 10
Chapter 2 – The propensity to innovate ...........................................................................11
2.1 Clarifying the concept .......................................................................................... 11
2.2 R&D Expenditures ................................................................................................ 11
2.3 Cited Patents ......................................................................................................... 12
Chapter 3 – The Industry Life Cycle (ILC) .......................................................................14
3.1 Introduction .......................................................................................................... 14
3.2 Introduction stage ................................................................................................ 15
3.3 Growth stage ......................................................................................................... 16
3.4 Maturity stage ....................................................................................................... 17
3.5 Decline stage ......................................................................................................... 17
Chapter 4 – Innovative patterns on the Industry Life Cycle .....................................18
4.1 Introduction stage ................................................................................................ 18
4.2 Growth Stage ........................................................................................................ 19
4.3 Maturity stage ....................................................................................................... 20
4.4 Decline stage ......................................................................................................... 21
Chapter 6 – Innovative patterns of early and late entrants ......................................26
Chapter 7 – Conclusions, Limitations and Recommendations ................................29
References....................................................................................................................................32
Additional reading ....................................................................................................................35
Hoofdstuk: 1.1 Problem Indication
Chapter 5 – The Industry Life Cycle of highly competitive markets .....................22
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Innovation in the mobile phone industry
Chapter 1
1.1 Problem Indication
1859. A year that has changed man’s paradigm forever. The year in which Charles
Darwin publishes his theories of evolution in the Origin of Species. Over 150 years after
this publication, even modern day economy is still influenced by these theories.
Organisms are depicted as proceeding through distinct cycles in their life as they age1.
Are products and firms equal to organisms in a way of a distinct life cycle? Researchers
over the last few decades, have tried to answer this question. Among others, William J.
Abernathy and James M. Utterback have contributed the most to this theory of industrial
evolution. By analyzing the American Automobile Industry, the PLC (Product Life Cycle),
and later the ILC(Industry Life Cycle), has came to terms. In summary, the evolution of
horizontal market structure and technological change of the US automobile industry
through its first 50 years or so conforms closely to the PLC2. However a lot of research
has been done regarding the relatively stable automobile industry, there is only little
known about the ILC of highly competitive and turbulent industries. This makes it an
interesting subject of investigation.
The market for mobile phones is probably the most dynamic of any in the world. The
degree and rate of change in technology, market adoption and product innovation is
staggering3. As the mobile phone market is highly competitive, it has a set of different
rules on survival and brings new questions. Innovations on the mobile phone market are
launched rapidly after each other and the fight for a steady market share is everlasting.
The ILC identifies different successive stages, in which each stages has its own
characteristics. What makes this an interesting topic of research is the question whether
forth different patterns of innovative behaviour. Are these patterns different compared
to regular market entries?
1
Bonner, (1993)
Klepper, S. (1997)
3
Turnbull, P., Leek, S., Ying, G. (2000)
2
Hoofdstuk: 1.1 Problem Indication
later entry of a firm’s market entry, in which the market has already evolved, brings
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Innovation in the mobile phone industry
1.2 Problem statement
As mentioned in the introduction, the ILC has been numerously tested against stable
environments, such as the automobile industry, but what is the pattern of the ILC in a
highly competitive industry such as the mobile phone industry? Does it have similarities
with the ‘regular’ ILC or is completely different? And what is even more interesting, does
the entry time of a firm matter regarding their innovative pattern? The following
question will be investigated in this article:
What is the influence of a firm’s market entry time on the relationship between
the market’s position on the Industry Life Cycle and a firm’s propensity to
Hoofdstuk:
innovate?
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Innovation in the mobile phone industry
1.3 Research Questions
First, what is propensity to innovate?
In order to give a clear answer on the research question, it is important to first clearly
delineate the chosen concepts. What is propensity to innovate? The main factors that form
the propensity to innovate will be explained in detail. Chapter 2 deals with this question.
Second, what is the Industry Life Cycle?
Again, as stated above, in order to give a clear answer on the research question, it is
important to first clearly delineate the chosen concepts. What is the ILC? The basic
concept of the ILC will be explained and its applicability to the turbulent mobile phone
market will be investigated. Chapter 3 deals with this question.
Third, what kind of innovative patterns do firms show within the Industry Life
Cycle?
Is there an innovative pattern for firms within a highly turbulent market? What does it
look like and what are the characteristics of the innovative patterns regarding the
different stages of the ILC. Chapter 4 deals with this question.
Fourth, what is the current ILC stage of the worldwide mobile telecommunications
market Industry Life Cycle?
This is a tricky question. Since we are unable to foresee the future, an indication will be
made based upon the standard models and published articles. It is important to know in
which stage the market is operating, since innovative patterns on different stages will be
analyzed and compared. Chapter 5 deals with this question.
early entrants in a market?
As a concluding question, the ILC of the mobile telecommunications market will be
investigated in order to investigate whether there are differences in the innovative
pattern of the early versus later entrants operating within the mobile telecommunications
market. Chapter 6 deals with this question.
Hoofdstuk: 1.3 Research Questions
Fifth, is there a difference in the innovative pattern of later entrants compared to
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Innovation in the mobile phone industry
1.4 Relevance
Since the market of mobile phones is growing and expanding as we speak, it is
important subject matter. The ILC of the mobile telecommunications market is relevant
for both researchers as managers. Gaining a better understanding of this phenomena
allows organizations to make a better future plan and makes them able to meet demand
better and faster. When we have a better understanding of the ILC of such rapid
changing, turbulent markets, we gain a clearer view of the phase in which a firm should
boost its innovation or whether they should act differently. Especially for the firms that
are acting within the mobile telecommunications market this is of great importance,
since their market is mapped. When a causal relationship is found between the
propensity to innovation among successful firms within the mobile telecommunications
market, this could be a clear sign towards other players within the market. Besides this,
it also contributes to research on highly technologically competitive markets as a whole.
1.5 Research Design and data collection
Since the relationship of different variables is considered as the subject matter, a
descriptive research design is proposed. The largest part of the thesis will be a literature
review, so most of the time, secondary data will be used. Data will be collected by using
different sources, such as the university’s library, Google Scholar and a lot of online
article-searching by using.
Of course, it is important in this research to use valid sources. Therefore, the University
online article search-engine will be used for searching valid articles. However, the article
search-engine has enormous limitations, since numerous articles are not represented on
the search engine. Therefore, Google Scholar will also be used as a backup search-
Hoofdstuk:
engine. Also, the recommendations of professor Hennessey will be taken into account.
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Innovation in the mobile phone industry
1.6 Graphical Framework
Entry time of
firm in the
market
Position of market
on Industry Life
Cycle
Propensity to
innovate
1.7 Variables explained
Dependent variable
Propensity to innovate: the strength of a firm’s tendency towards innovation. The
propensity to innovate can be measured using variables like R&D Intensity and Patent
Citation, further explained in chapter 2.
Independent variables
Position of market on ILC: The acclaimed phase of the ILC in which the market is
currently ‘operating’. In chapter 3, the different phases of the ILC will be discussed in
detail.
Moderating variables
Entry time of firm: the timing of the momentum in which a firm enters a predefined
H1: the later the entry time of a firm, the more negative the effect on a firms’
propensity to innovate
Firms that enter the market later (have a later entry time), are often imitating the pioneers
on the market. Besides this, barriers to entry often make a new entrant less profitable
than the established firms in the industry4. This could also mean that less money is spend
on R&D, which in turn, result in a lower propensity to innovate. In chapter 6, this will be
further discussed.
4
Stigler, G. (1968)
Hoofdstuk: 1.6 Graphical Framework
market.
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Innovation in the mobile phone industry
Chapter 2 – The propensity to innovate
2.1 Clarifying the concept
According to Thomas (1993), the propensity to innovate is “the balance of organizational
forces that propel and resist change in new product development. Propensity to innovate
consists of organizational identity, influence processes, information and communication
processes, resource flexibility, decision-making processes and implementation processes”.
In the area of innovation and dynamic capabilities, the measurement of the propensity
to innovate and innovation is one of the most discussed issues over the last decade.
Since innovation is post to new products and processes, it is hard to qualify or quantify
the standards to measure innovation. It involves multidimensional novelty in aspects of
learning or knowledge organization that are difficult to measure or intrinsically nonmeasurable5. In this paper, not all factors that affect the propensity to innovate will be
discussed. The main focus will be on the relationship between the ILC and the
accompanying propensity to innovate among firms that operate within the life cycle.
Although there is a lot of difficulty in and indistinctness about measuring innovation, a
lot of effort has been and is made to find a suitable solution. It is not impossible to
measure innovation, but when searching for a valid measurement, precaution is
required for finding a similar variable over all firms. For example, when Ford creates
new automobiles with highly improved motors, this is of course a great innovation. But
it is hard to measure and compare this static fact to other automobiles, since this is a
new technology and it has little similarities on which the innovation can be assessed.
Therefore, in order to make a steady comparison on innovation between different firms,
researchers have searched for commensurable elements within a firm.
2.2 R&D Expenditures
Different measurement models and variables have been investigated. One of the most
used models to compare innovativeness among firms is the measurement of R&D
expenditures within a firm. According to Smith, it is often difficult to draw the dividing
criterion for distinguishing R&D from related activities is the presence in R&D of an
appreciable element of novelty and the resolution of scientific and/or technological
5
Smith, K. (2005)
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line between what should be counted as R&D and what should be excluded: "The basic
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Innovation in the mobile phone industry
uncertainty, i.e. when the solution to a problem is not readily apparent to someone
familiar with the basic stock of commonly used knowledge and techniques in the area
concerned”. Next to the fact that R&D intensity is sensitive to errors, R&D expenditures
input measurements do not show the efficiency of the process by which inputs are
transformed into outputs, or into innovative products6. Neither does it show the
technological difficulty of the produced products. R&D data is always constrained as an
innovation indicator by the fact that it measures an input only7. There are, however, also
some positive sides to the measurement of R&D expenditures. Since R&D expenditures
are monitored and stored by firms, there is a enormous amount of detailed information
available on which research can be done. Since the R&D expenditures are not countryor area-specific, it can be generalized among different firms. Often, R&D expenditures
are tracked for longer periods, which make the information available even richer.
Nevertheless, it is important to combine the information on R&D expenditures with
more variables.
2.3 Cited Patents
Besides R&D expenditures, a commonly used model to measure innovation is by
tracking the number of patents used by a firm. Patents have been used as indicators of
technological activity8. A patent is a public contract between an investor and a
government that grants time-limited monopoly rights to the applicant for the use of a
technical invention9. This means that whenever a new product, process or even the
slightest novel change in the former mentioned, this could be patented, which could
create competitive advantage for a firm. However, the problem that came to rise with
the case of patents, was that patents do not measure innovative behavior. They measure
inventive behavior. According to Lueke and Katz (2003), “innovation is generally
understood as the successful introduction of a new thing or method. Innovation is the
embodiment, combination, or synthesis of knowledge in original, relevant, valued new
products, processes or services”. An example to illustrate this is the invention of the
DSK-keyboard. The Dvorak Simplified Keyboard, as its original name is, has been
produced in response to the original QWERTY-keyboard. The DSK-keyboard is said to be
invention, that could save firms an enormous amount of money, since the efficiency of
6
A literature based innovation output indicator
Kleinknecht
8
Archibugi 1992
9
Iversen 1998
7
Hoofdstuk:
20 to 40% faster than the QWERTY-keyboard. In terms of inventions, this is a major
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Innovation in the mobile phone industry
desk-jobs could increased by 20-40%. But the DSK-keyboard was a competencedestroying invention, since people had to learn to use a keyboard in a new, different
way. Due to the fact that many people were already used to the QWERTY-model, the
improved DSK-keyboard has never become a commercial success and will never be. In
this case, the QWERTY-keyboard is both an invention as an innovation, while the DSKkeyboard is only an invention. A patent can only measure whether something is
inventive, they cannot show the commercial success of certain inventions. Therefore, a
new, improved patent-measurement system, called patent citation has been developed
by Narin and Olivastra. In their article they argue that the more a patent is cited, the
higher the technological importance of this patent. Although there is said that patents
cannot be a direct measure of the commercialization of innovations, for they focus on an
intermediate part of the innovation process, Hall et al (2005) prove that patent citations
do contain signification information on the market value of firms. Therefore, patent
citation and R&D intensity will be combined in this paper to indicate the innovativeness
Hoofdstuk: 2.3 Cited Patents
of firms.
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Innovation in the mobile phone industry
Chapter 3 – The Industry Life Cycle (ILC)
3.1 Introduction
In order to answer the research question, it is of vital importance to give a clear view of
the ILC. The perspective on the ILC is one that has emerged from different perspectives
along the lines of history. The economic perspective (Oliver Williamson, 1975), the
technological perspective (Abernathy & Utterback, 1975) and the biological perspective
(Philip Drew, 1987) on different growth life cycles have been combined into one theory;
the theory on ILCs (further called ILC).
The ILCs shows a large amount of similarities with the Product Life Cycle (further called
PLC), introduced by Dean (1950) and Levitt (1965). Both the ILC and the PLC tell us
about the growth and evolution of markets, respectively products. There is a clear
distinction between different stages within the life cycle, as shown in the graph below.
Graph 1
Hoofdstuk: 3.1 Introduction
Each stage has their own set of distinctive characters on market volume, uncertainty and
product design among others.
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Innovation in the mobile phone industry
3.2 Introduction stage
When browsing through the literature on ILC’s and PLC’s, the exploratory stage, initial
stage, embryonic stage and the early ‘fluid stage’ are basically all terms for the same
stage: the introduction. The market is still searching for its best form, and among
consumers, only the early adopters seem to notice the industry. As seen in the graph on
the previous page, the industry output is still on a basic level with a low output.
However, the profit margins on the produced products are often higher compared to the
products in later stages of the ILC. According to Mueller and Titon (1969), large firms
have no particular advantages in R&D during the introduction phase. As size advantages
are absent, the industry is attractive for new market entrants. They enter the market,
attracted by the high profit margins and the often low barriers to entry. As many firms
enter the market in this early stage, the competition is relatively high. The market is
searching for an emerging dominant design that will rule the market. The highest part
of the competition is based upon product innovation, since the production process is
still on a basic, starting phase, in which more emphasis is put on product innovation,
rather than process innovation. It is important to create a bias-free product first, and
optimize the production process to this product afterwards. Otherwise, it would be
extremely expensive and time-consuming to innovate simultaneous on both levels, since
they are intertwined and adaptations on one side create reflections into the other. E.g.
when mobile phone X can be produced with a new and better camera lens, this has
implications for the machinery. They have to be re-installed and re-configured, which is
costly. But these are costs that have to be made whatever happens. If a firm would also
invest into innovation to create a better production process, this could be wasted
money, since the product can still change on different levels, which make the process
innovation on certain levels superfluous. As firms are still searching for the best product
competition, low output and high amount of market entrants, the uncertainty level is
extremely high in the introduction phase.
Hoofdstuk: 3.2 Introduction stage
configurations, R&D is mostly used on a trial-and-error basis. Due to the intense
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Innovation in the mobile phone industry
3.3 Growth stage
During the second stage, the growth stage, the industry is growing at high speed. The
product competition in the introduction stage has resulted in stabilizing product designs
and the speed of product innovation is slowing down. The competition between firms on
the market is spread over multiple levels. Not only on basis of the characteristics of the
product, but also the price is heavily involved in the battle10. Due to the intensive
product innovation in the introduction stage, the production process becomes more
refined. Specialized machinery is substituted for labor11. This results in more large scale
advantages; economies of scale. The economies of scale, that are available as a result of
specialized production, are found in the larger firms within the growing market12. As
product innovation is slowing down and products are more and more standardized, the
profit margins on produced products lowers, but since the volume of the number of
produced products increases, larger firms can still make enormous profits. As the profit
margins on the products are less profitable than in the introduction stage, the market
becomes less attractive for new firms that want to enter the market. At the end of the
growth stage and in the beginning of the maturity stage, therefore, often shakeout
occurs. Shakeout is a term used in business and economics to describe the consolidation
of an industry or sector, in which businesses are eliminated or acquired through
competition13. Shakeouts are a common phenomenon in rapidly growing markets. Entry
appears to be relatively easy, but survival is not14. As said above, the production process
is standardized, which leaves less room for high profit margins. Large firms therefore
have a competitive advantage due to their economies of scale. According to Klepper
(1996), as long as demand is not ever expanding, profit margins of new entrants decline
to zero over time while existing small firms become unprofitable and exit. The market
experiences a shakeout. Small and new firms are the victim in this process. In general,
the surviving firms are larger and fewer in number. However, the standardized
produce at a high rate, to maintain a large profit. More and more consumers are
becoming aware of the products and the output growth is high15. During the growth
phase, not only the volume of the produced products, but also the variety of products
10
Rumelt (1979)
Klepper (1997)
12
Mueller and Tilton (1969)
13
Scott (1998)
14
Geroski (1995)
15
Klepper (1997)
11
Hoofdstuk: 3.3 Growth stage
production process increases the production volume. This means that large firms can
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Innovation in the mobile phone industry
steeply increases16. Of course, this also explains a part of the fast growing industry. More
variety, more choice, appeals to a wider spectrum of segmented consumers, which in
turn results in more sales.
3.4 Maturity stage
The maturity stage, as seen on graph 1, is characterized by a slowly stabilizing output
growth. The growth from the previous stage is starting to slow down. The market is still
growing in size, but since more and more people are involved in the market, the surplus
of non-consumers is decreasing. The market share is still growing, but the growth
becomes more predictable17. A dominant design has already emerged in the industry
and the scope of innovation is changing from product to process innovation18. This
process is a result from the increased output volume. The margins on the products are
increased through economies of scale, as discussed before. As the dominant design
emerged and numerous innovations have been made to the product, the focus of R&D
changes to process innovation. A stable, standardized production process introduces
these economies of scale. There is a lower emphasis on market share growth19
3.5 Decline stage
The final stage in both the PLC and the ILC is the stage of decline. The market is
decreasing in size and consumers are slowly leaving the marketplace. Many firms are
entering market niches to save their profits and avoid market shakeout. New
technologies or products are emerging and the market is slowly disappearing. For
16
Hambrick et. al (1982)
Williamson (1975)
18
Hofer (1978)
19
Hamermesh (1978)
17
Hoofdstuk: 3.4 Maturity stage
example, the market change from videotapes to DVD’s.
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Innovation in the mobile phone industry
Chapter 4 – Innovative patterns on the Industry Life
Cycle
4.1 Introduction stage
The ILC has been numerously researched in the past. Though the literature on
innovative patterns on the ILC is not extremely extensive, there are some articles that
build a solid foundation on innovative patterns. There are two types of innovations that
are found in organizations. On one hand, there is a pattern of creative destruction
(widening). This entails organizations that introduce innovations while they have never
innovated before. On the other hand, there is the creative accumulation pattern, which
entails new innovations by organizations that have introduced more innovations
(deepening). Among others, Abernathy and Utterback (1975) created an early model of
process and product innovation along the lines of the ILC. The graph below shows their
Graph 2 – The development of product and process innovation
The introduction stage is often instigated by a radical innovation or a technological
discontinuity20. During the introduction stage, as mentioned before, participating
organizations are intensively investing in product innovation. The market is still
searching for a dominant design and there are no economies of scale yet for large
organizations. New organizations enter principally to compete for the dominant product
design for that industry21. There is a low entry barrier, which causes more organizations
20
21
Anderson & Tushman (1990)
Agarwal & Audretsch (2001)
Hoofdstuk: 4.1 Introduction stage
findings on the rate of innovation in relationship to the stages of the ILC.
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Innovation in the mobile phone industry
to enter the market. Therefore, the introduction and the growth stage are characterized
by a high degree of competition. As seen in the model above, the level of process
innovation is rather low in the introduction phase of the ILC. Organizations run too
much risk focusing on a sole design. According to Haupt et al. (2007) “in the beginning of
a technological life cycle, there are still few new patents belonging to the same technology
which must be cited. Older patents to which the new technology refers prevail”. As the
market has not chosen the dominant product design yet, the organizations run risk of
becoming obsolete in their own production process (they are already building a
production process around the product, while the dominant design is not known yet).
Innovative insights come from individuals or organizations that are intimately familiar
with the recipient process, rather than those intimately familiar with new
technologies22. There is a focus on market needs instead of new technology. In the
introduction and growth stage, market entry by new organizations is often driven by
new innovations. According to Geroski (1995), ‘entry is often used as a vehicle of
introducing new innovations’.
4.2 Growth Stage
The growth stage is to a large extend the same as the introduction stage when taking
into account the innovating pattern. During the growth stage, most innovations are still
product-based,
since
organizations
are
searching
for
product
performance
maximization, as seen in the graph on the previous page. However, the level of processbased innovation is slowly rising. During the growth stage, innovations leading to better
product performance might be expected to be less likely, unless the performance
improvement is easy for the customer to evaluate and compare23. The dominant design
is emerging and organizations have the ability to adept a general model. According to
Haupt et al (2007) “some of the older basic patents have to be cited, but the effect of the
are regularly introduced until the technology has fully matured24. Innovations are more
and more build upon advanced technology instead of basic primary productinnovations. Organizations are motivated to innovate during the growth stage, as a
result of the increasing market demand. According to a model of De Bresson and
Townsend (1981), the number of different product models and the amount of product
22
Abernathy & Utterback (1975)
Abernathy & Utterback (1975)
24
Koski & Kretschmer (2006)
23
Hoofdstuk: 4.2 Growth Stage
citations of the growing number of recent patents will prevail”. Incremental innovations
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Innovation in the mobile phone industry
innovations is at a maximum during the growth stage. In later stages, this will slowly
decline.
4.3 Maturity stage
When the ILC reaches the point of maturity, the uncoordinated processes that were
dominant during the introduction and growth phase, have changed into wellcoordinated systemic processes. There are relatively less product innovations and the
focus changes more to process innovations. As seen in the graph, the process
innovations are technology-driven. The focus of organizations changes from product
performance maximization to product cost minimization. There is a quiet switch from
product to process innovations25. According to Audretsch (1995), the maturity stage has
only a small amount of product innovations in relation to the amount of R&D spent.
Process innovation is principally designed to lower a firm’s average cost of production,
while product innovations are often designed to attract new buyers for a product26.
Thus, during the maturity stage the transition from product-innovation to a processinnovation orientation is understandable.
Since the dominant design has already
emerged, there is little room for introducing complete new products that compete with
the current dominant design. This could, besides being a total waste of time and money,
be a suicide mission for an organization when the design is not accepted, since the costs
that are implicated with the introduction of a new design are extremely costly. As
shakeout occurs somewhere between the introduction stage and the maturity stage, the
number of market players is downsized and the most major organizations are still alive
and kicking. When organizations survive the shakeout, or at least the first few years
after entry, Audretsch (1995) has found that the likelihood of survival is improved with
regard to the future. According to Campbell (1983) “the average time between citing and
cited patents increases”. During the maturity stage, the definite market-leading
organizations will emerge (if it was not yet during the growth or introduction phase).
Although several assumptions have been made about the low innovative levels of
market leaders in a mature industry, McGahan and Silverman (2001) have found
evidence that refutes the assertion that leaders have less incentive to innovate during
during the maturity stage is not lower compared to other stages; it just focuses on
different innovative parts.
25
26
Filson (2002)
Audretsch (1995)
Hoofdstuk:
maturity than non-leaders. They also found that the absolute amount of innovation
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Innovation in the mobile phone industry
4.4 Decline stage
As the stage of decline is reached, the market is slowly decreasing. Product innovations
are solely based on product cost minimization. For example, organization A has a
product, product X, and this product is fabricated with the use of fabric AA. However,
R&D has shown that product X can also be produced with fabric BB, which is 20% less
costly. During the stage of decline, the profit margins on products are slowly declining
and therefore, the cost minimization strategy is often used. As the graph also shows, the
amount of process innovation, which is also slowly declining, is mainly cost stimulated.
To compensate the loss due to lower profit margins and the declining market,
Hoofdstuk: 4.4 Decline stage
organizations often enter niche-markets to expand their customer-base27.
27
Klepper (1996)
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Innovation in the mobile phone industry
Chapter 5 – The Industry Life Cycle of highly competitive
markets
In the past couple decades, extensive research has been done regarding the ILC. Among
others, the U.S. automobile industry was a popular topic of study, as Klepper(1997),
Klein(1977), Mueller&Tilton(1969) and Audretsch(1995) dedicated articles to these
industries (which are only the top of the iceberg). While the automobile industry has
become relatively stable, there is another emerging market which attracts a lot of
attention. The mobile telecommunications market is today’s booming business. Mobile
telecommunications is subject to very rapid technological change, especially in the
transmission technology28. For example, within the last decade, major mobile phone
innovations have been made, such as the slide phone, touch screen, video-conferencing,
watching TV on your mobile, internet on your mobile and the Bluetooth technology. The
organizations on the market of mobile phones are continuously innovating and bringing
new products to the market.
The mobile telecommunications industry has had some difficulties at the startup. The
first generation analogue systems used portions of the spectrum around the 450 MHz
frequency29. This analogue system only had a little capacity through which the
economies of scale could not be used. This resulted in a market in which only a few, or
even one player, was active and ruled the telecommunications industry. The spectrum
later broadened, thanks to the digital technology. Not only did this increase the overall
capacity, but it allowed multiple operators to exploit economies of scale30. The evolution
of mobile telecommunications services was further affected by regulatory decisions
concerning spectrum licensing, competition and the coordination to a common technical
standard31. This caused the industry to become a duopoly or an oligopoly. As the
regulations and innovations kept increasing, the competition increased which caused
more organizations to enter the market. Figures don’t lie: the number of new
subscribers grew by 61% in 1998, yielding a European-average penetration rate of 23.5
mobile phone subscribers per 100 inhabitants32. Like all innovations, mobile
28
Calhoun (1988)
Gruber (2000)
30
Gruber (2000)
31
Gruber & Verboven (2001)
32
Gruber & Veboven (2001)
29
Hoofdstuk:
telecommunications are not immediately adopted by all potential subscribers, since the
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Innovation in the mobile phone industry
adoption decision takes time33. But is there a difference in innovative behavior
compared to ‘regular markets’? Do highly competitive markets have different standards
or is the ILC and are all its characteristics applicable to multiple, highly competitive
markets?
The introduction stage of the mobile telecommunications industry has taken innovation
to be true according to the graph presented earlier in this paper. Innovations on
infrastructure and technological standards were followed by a vast amount of product
innovations (lower weight, longer talk time)34. In the graph below, the development of
handset models on average weight, talk and standby times is presented from 1991 till
2003. As discussed earlier in this paper, during the introduction stage and the growth
stage, organizations are intensively innovating. In the introduction stage, the emphasis
Graph 3
is on the product performance maximization through product innovations. In later
stages, this emphasis changes from product performance maximization to product cost
33
34
Gruber (2000)
Koski & Kretschmer (2006)
Hoofdstuk:
minimization.
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Innovation in the mobile phone industry
Product innovation is starting to lower and process innovation is extensively growing.
To give an indication of the intensity of innovation, see the two tables below. Table1
Table 2
Table 1
shows the number of new handset models that have been introduced from 1992 until
2003 and Table 2 shows the number of US patent applications by the three biggest
manufacturers of mobile phones from 1991 until 2002. When looking at the number of
patent applications, the level of innovation has increased during the last couple of years,
since more patents are being applied. This shows differences compared to a regular
maturating industry, since this is supposed to decrease. Research has shown that new
entrants contribute most to the innovations in an industry35. There is some
contradicting data here if we measure innovation by new products only; 40% of the
mobile phones that have been introduced on the market between 1992 and 2003 have
35
36
Czarnitzki & Kraft (2003)
Koski & Kretschmer (2006)
Hoofdstuk:
been produced by the five largest organizations on the market36.
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Innovation in the mobile phone industry
The major difference between the ‘regular’ markets and the high technology lies in the
maturity stage. High technology industries are continuously innovating on a
technological basis. This also partly explains the reason why there are so many
innovations in the mobile telecommunications industry. Old technologies are
continually becoming obsolete, current technologies are being advanced and adapted for
Graph 4
new applications, and new technologies are being sought37.There is, however, at the
moment still little data on the maturity stage of the mobile telecommunications
industry, as the industry is on the bridge of crossing the growth stage to the maturity
stage38. In graph 4, the development of product innovations on the mobile
telecommunications industry is shown from 1992 until 2003. As you can see, the last
three years, the number of new product innovations is growing again, while the market
37
38
Barczak (1995)
Gruber & Verboven (2001)
Hoofdstuk:
is slowly reaching the point of maturity.
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Innovation in the mobile phone industry
Chapter 6 – Innovative patterns of early and late
entrants
Entry time. For some organizations the timing is a blessing, for some it is a true curse.
The timing of entry is of vital importance in entering a market. When the market is
entered too early, there are premature entry risks and entering too late can cause
missed opportunities39. In 1978, Capon introduced a model of entry strategies. An
entrant in the introduction stage is a ‘pioneer’, an entrant in the growth stage is a
‘follow-the-leader’, an entrant in the late growth/maturity stage is a ‘segmenter’ and an
entrant in the maturity stage is a ‘me too’. Not one of these strategies has the most
chance of success; they all require different capabilities. An early or late entry in a
market has several advantages. But not only is the timing of the market entry important
for financial success. As entering in a technological highly-competitive market requires
organizations to have extensive technological knowledge and a vast amount of R&D
available to attain innovations. The innovative advantages of newly entering firms are
also differs along the setting of the technological regime. There are ‘entrepreneurial’ and
‘routinised’ regimes, which in turn depend on the degree to which knowledge is based
on non-transferable experience40.
Graph 5
The entrant of a market basically has two general options: To innovate or to imitate?
The second choice that has to be made is the timing of entry. Are we entering early and
are we trying to become a pioneer or are we entering later and try to become specialized
in the market, which will generate word-of-mouth effects41. Next to this fact, the
39
Lilien & Yoon (1990)
Breschi, Malerba & Orsenigo (2000)
41
Lilien & Yoon (199)
40
Hoofdstuk:
in certain knowledge? A pioneer, a first entrant, can establish a well-known reputation
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Innovation in the mobile phone industry
production costs are lower for pioneers than for later entrants42. A general disadvantage
of early entrance is the increased risk and the costs of developing a product and putting
it in the market. Pioneers are required to make extreme investments into their R&D
department. This gives a huge boost to the R&D intensity. Pioneers have a high
propensity to innovate. Imitators that enter shortly after the pioneer have fewer costs
and can imitate the produced product43. They invest less intensive in R&D. An early
entrant is required to innovate continuously, as competition intensifies. During later
stages of the ILC, organizations could choose to innovate less due to several reasons.
They could fear cannibalizing established products of themselves44. Another important
reason for failing innovation systems is the organization’s satisfaction with the current
sales. Never change a winning team. Next to this, when an organization grows, it
becomes more bureaucratic and static. It will take more time introducing innovations.
Small organizations have a small advantage when entering the market at an early age,
since no dominant design has emerged and the barriers to entry are relatively low (no
size advantages). Huergo and Jaumandreu (2002) have found that: “entering firms and
firms of the youngest cohorst are prone to innovate more, and the oldest ones propend to
innovate less than entrants”. Besides this, research has proven that early entry has more
probability on long-term market share45. Of course, the timing of the market entry also
depends on the growth of the market. When the market is stagnating in the starting
phase, it is not interesting for organizations to put a lot of effort in R&D for that market.
Also, the higher the level of innovation that are being introduced by new market
entrants, the higher the level of information that has to be created by the R&D
department, which increases the R&D intensity of that organization46.
Organizations that enter in the growth stage, the so-called ‘follow-the-leaders’, have to
put a lot of effort in product placement. As the pioneer has opened the market and
gained attention by potential customers, new entrants will enter the market and try to
gain market share. ‘Follow-the-leaders’ are still heavily investing in product innovation
in the run for the dominant design. However, organizations entering during the growth
stage have a large possibility of mortality. This is due to the massive amount of entrants
that try to compete for the dominant design. Agarwal (1998) has identified that the
42
Abell & Hammond (1979)
Mansfiedl, Schwartz & Wagner (1981)
44
Schnaars (1986)
45
Urban et al. (1986)
46
Schoonhoven (1981)
43
Hoofdstuk:
number of patents increases during the introduction and the growth stage, and slowly
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Innovation in the mobile phone industry
declines during later periods. Haupt et al. (2007) found that the number of patent
applications remains constant during the maturity stage.
Organizations that enter during the late growth/maturity stage, the ‘segmenters’,
normally focus on a certain segment or part of the market. They have to invest heavily in
product innovation since they want to meet special needs for a certain crowd. When
entering, the process innovation is still lower than product innovation, since the needs
of customers have to be identified. Organizations have the ability to innovate or to
imitate. Of course, the latter will be less costly in terms of R&D intensity. It is still
possible for late entrants to become market leading organizations. They should not
necessary be pioneers. There are, however, some conditions that have to be met. They
should have a dominant position on brand-name recognition, strength in distribution,
production or managerial expertise47.
The ‘me-too’ entrants, the entrants during the maturity stage have to attain aggressive
tactics. They have to attack the vested organizations with price differentiations and they,
depending on their strategy (imitation/innovation), will invest in process innovation.
The level of mortality among mature stage entrants is significantly higher than during
earlier stages48. The later entrance thus poses a greater risk for survival than earlier
entrance. The source of information is important in understanding the relative
advantage between entrants and incumbents. When the innovation is based on nontransferable experience, the incumbent has an innovative advantage49. Next to this,
Urban et al. (1986) showed that late entrants could gain large market shares by using
aggressive advertisement. This is, by the way, also a topic that requires more research.
What causes later entrants to succeed? Is it a brilliant marketing campaign or is it
technological superiority? Late entrants are often confronted with size disadvantages
when entering (compared to the market leading organizations). However, Porter(1979)
and Newman (1978) proved that small organizations can still enter the market during
47
Schnaars (1986)
Agarwal & Gort (1996); Klepper (1996); Suarez & Utterback (1995)
49
Gort & Klepper (1982)
48
Hoofdstuk:
the maturity stage, but they should focus more on niches in that market.
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Innovation in the mobile phone industry
Chapter 7 – Conclusions, Limitations and
Recommendations
This research has been done in order to answer the question that is stated below:
What is the influence of a firm’s market entry time on the relationship between the
(highly competitive) market’s position on the Industry Life Cycle and a firm’s
propensity to innovate?
As the research progressed, literature has shown to be a valuable partner in this
research. Although the library is stocked with extensive research on entry time,
innovative patterns, the ILC and innovativeness, the combination of all factors has been
researched to a smaller extend. In this research, the propensity to innovate is measured
by combining ‘R&D intensity’ with the variable ‘patent citation’. These two variables
have been combined on purpose to create a stable criterion.
H1: the later the entry time of a firm, the more negative the effect on a firms’
propensity to innovate
The hypothesis stated above is rejected. Later entry of a firm does not have more negative
effects on the propensity to innovate per sé. The propensity to innovate depends on more
factors than only the entry time of a firm. Besides this, earlier in the article is mentioned
that market entrants show a higher level of innovative behavior than market incumbents.
Throughout this paper, several conclusions can be stated. The timing of the entry time
definitely has an effect on the relationship between a firm’s position on the ILC and a
firm’s propensity to innovate. However, there is neither clear positive nor a negative
relationship between the variables. The direction and the intensity of the relationship
knowledge and their decision whether to innovate or to imitate. Innovative entities are
investing more money in R&D compared to imitating firms. This does not mean that
innovating firms have more chance of success. There are some striking parts when
Hoofdstuk:
are dependent on the stage of the ILC, the entry-strategy of a firm, the availability of
2
9
Innovation in the mobile phone industry
comparing the propensity to innovate of firms within a highly technologically
competitive market to ‘regular markets’. As the literature on the ILC states that
innovation is the highest during the introduction stage and gradually drops throughout
the others stages of the ILC, an analysis of the mobile telecommunications industry
shows an interesting difference. The number of patent citations gradually grows, while
literature states that this should gradually drop. As the mobile telecommunications
market is entering its maturity stage, this is an interesting topic to attain for further
research. While, this research only contributes marginally to existing knowledge, the
limitations and gaps in the research are interesting to investigate further.
First of all, what is the propensity to innovate? The variable as used in this paper is
based upon a combination of R&D Intensity and patent citation. They are both input
variables, since they do not measure the output of the invested time and money. They
do, however, measure the propensity to innovate. An extensive amount of articles
measures ‘innovativeness’ in several different ways, among others, patent citation and
R&D intensity. The problem with patents in general, is that they measure inventive,
instead of innovative behaviour. They also measure inventions that may be of little
importance. Innovations are based upon the novelty combined with the commercial
success, while inventions are only based upon the novelty. Patent citation tries to
overcome this roadblock by counting the number of times that a certain patent has been
cited (the more, the merrier). If a patent is numerously cited, it must be a commercial
interesting patent. But even patent citation has its limitations. Several organizations are
not patenting on purpose, for example, to protect their knowledge. This makes the
measurement of patent citation another incomplete measurement model. R&D intensity
is also no perfect wall. R&D is not the only ‘input’ towards an innovative product. It
purely measures the amount of money invested in the area of Research and
Development. They say something about the propensity to innovate; the willingness to
innovate, but R&D intensity says nothing on the innovativeness of products.
Another roadblock in the modern literature is an ‘innovation’ itself. When is something
innovative, and more important, how to measure how ‘innovative’ a product is? Is a
technological terms? If new products are introduced on a market, they do not have any
products
to
compare
them
with.
Besides,
when
looking
at
the
mobile
telecommunications industry, for person A, the innovation called ‘touch screen’ could be
Hoofdstuk:
product innovative when it is new for the organization, new for the market, or new in
3
0
Innovation in the mobile phone industry
perceived much more innovative than for person B. In various articles, innovations are
measured along questionnaires. Most questionnaires are not homogenous and are
dependent on subjectivity. What is beautiful for A, may be ugly for B. This gives
innovations a subjective character. There are too many gaps in the literature to find a
perfect definition and measurement-model for innovations.
As this paper focuses on the propensity to innovate of market entrants in highly
technological competitive markets, some contradicting theories have been found.
According to Klepper (1996) “after entry ceases, the expected number of product
innovations of all firms declines over time”. When taking a look at the current mobile
telecommunications industry, it has reached the point of pre-maturity. The entry has
already started ceasing a couple of years ago and the market is dominated by a handful
of large organizations. However, according to Koski & Kretschmer (2006), the number of
patents and new product innovations introduced on the mobile telecommunications
market are still increasing! This shows a gap in the literature in which the new highly
competitive markets slip through. One of the explanations may be that consumers are
continuously searching for new models, as the mobile phone is not only perceived as a
communication device, but also as a fashion-statement. Another explanation may be the
mistaken PLC of mobile phones. According to Porter(1983) the dominant design, as
spoken of earlier in this paper, does not appear to apply to all new products, especially
ones for which buyer tastes are diverse. Therefore, the new competitive industries
require more research. Of course, this market could be an exception on the rule, but
more research on the mobile telecommunications industry is needed in order to gain
better understanding of this phenomena.
A final note: perhaps it would be interesting to do more cross-sectional research over
different high technology/competitive industries. Information on a single industry is
hard to generalize, but gives important insight on that industry. Combining information
of different industries will be useless for a specific market, but could give us better
Hoofdstuk:
insights on the variables that act within the different markets.
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Innovation in the mobile phone industry
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