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

Life cycles, firm strategies & industrial evolution

Andy Davies

Overview

Explanations of innovation and industrial evolution

Product life cycle - industries evolve from birth to maturity (typical of mass production industries) Different pattern in CoPS

Case study of mobile communications system Ericsson's strategies

Product life cycle (PLC)

Product innovation

Process innovation Rate of Major Innovation

Dominant design

Fluid Phase

Transitional Phase

Specific Phase

(page xvii, James Utterback, 1994)

PLC example

'The fundamental architecture of the automobile was achieved by roughly 1925 - an enclosed steel body mounted on a chassis, powered by an internal combustion engine. And by the end of the 1930s, improvement in product characteristics had virtually ceased'
Mowery and Rosenberg, p57, Paths of Innovation, 1998)

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

Technological discontinuities

Periodic waves of radical innovation

New firms invade the traditional industry Technical change is 'competence destroying' Industry shakeout Established firms develop the capabilities and learning to bridge discontinuities

Discontinuities explain consumer goods:

decline of US and EU rise of East Asian suppliers

Example of a discontinuity

'This situation of limited product variety and innovation began to change during the 1970sBy the late 1970s, leading Japanese automobile firms such as Toyota and Honda had perfected new techniques for production organisation and product development that made possible the creation and manufacture of a broader variety of higher-quality products than were available from US producers'
Mowery and Rosenberg, p57-8, Paths of Innovation, 1998)

PLC - strengths & weaknesses

Explains mass production industries

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

Critics of life-cycle models

Problems with biological analogies: 'development of firms does not proceed according to the same 'grim' laws as living organisms' (Penrose, 1952) Inter-industry & sectoral differences in innovation (Pavitt, 1984)

PLC in CoPS?

PLC doesn't apply to CoPS:

'In other industries (e.g., military and commercial aircraft, large turbine generators), automated mass production is never achieved and most innovation is product-oriented' (Michael Porter, p194, Competitive Advantage: 1985)
'high volume, process intensive stages of the product life cycle may never occurThus competitive strategies are likely to centre upon the design and development 'stages' of the conventional product life cycle' (Miller and Hobday et al, 1995)

Innovation in CoPS

No dominant design in the conventional sense Long-term stability at the systems integrator level - despite technological discontinuities Technical change is not necessarily competence destroying

Case of mobile communications

Mobile handsets (consumer goods)

An assembly designed, mass produced & marketed in high-volume to the final consumer

Mobile networks (CoPS)

A system designed, implemented and configured for mobile operators Subsystems: radio base stations, base station controllers, switches, operationg systems, data bases

Mobile communications system

Mobile switching
centre (MSC)

Mobile switching
centre (MSC)

Subscriber data base Roaming data base

Base station Controller (BSC)

Base station Controller (BSC)

Base station

Base station

Base station

Base station

Base station

Base station

Products Operating subsystem

Production

Users/markets

Firms Ericsson

CoPS Switching subsystem unit, small batch, large batch production of subsystems & components Project-based design & implementation of systems

Business-tobusiness Business users heavily involved in design and specifications

Motorola Lucent T. Nortel NEC Siemens Nokia

Base station controller

Alcatel
Samsung Qualcomm Nokia Sony/Ericsson Motorola Samsung, etc.

Radio base station

Mobile handset

Mass produced High volume

Consumer goods Mass marketing to final consumer

Mobile handsets - PLC dynamics

European suppliersmust reach levels of efficiency in production achieved by Asian manufacturers of highvolume consumer goods. The associated dynamics of manufacturing design and marketing of products with short life-cycles must also be mastered (CEC, Green Paper, 1994) Established suppliers - market share (2001)
Nokia (35%), Motorola (14%) and Ericsson (7.5%)

New competition from East Asia

Samsung (6.6%), Panasonic (4.6%), NEC (3.3%)

Generations of mobile systems

1G (1981) Analogue 2G (1992) Digital
analogue transmission between handset & RBS FDMA - divides channels by range of frequencies

narrowband voice & low-speed data 9.6kbps digital transmission TDMA (slice spectrum into time slots) & CDMA (unique codes for each message)

3G (2001) mix of circuit & IP packet-switching overcomes 2g circuit-switch bottleneck (highWidespeed data) band
high-capacity (2mbps) services radio access based on CDMA

Technical standards
NMT GSM W-CDMA

CDMA

CDMA2000

AMPS

D-AMPS

1G
1981-83 1992-5

2G
2001 Significant technological evolution Limited technological evolution

3G

Life cycle dynamics

Architectural phase New system generation phase

Rate of Major Innovation

Archictectural innovation R&D efforts Development of standards

Component & systemic innovation Product design and manufacture Project development and implementation

Ericsson

Vertically-integrated telecoms manufacturer (fixed and mobile networks) Delivered world's first mobile system in 1981 World ranking in 2001
No. 1 supplier of mobile networks No. 3 supplier of mobile handsets

Ericsson - 1G systems

Strategic focus - 1970s & 1980s

Traditional focus on fixed telephony (AXE digital switch) Mobile unit - small, autonomous, entrepreneurial, but marginal

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

Environment
Benefits from rapid adoption of NMT standard Small home market encourages expansion abroad (USA 1983) Quick to take advantage of liberalised markets (e.g. Vodafone UK 1983)

Ericsson - 2G systems

Mobile systems become strategic

In 1994 Radio Communications over 50% of Ericsson's sales & 30% of the workforce In 1997 Radio Communications 70% of total sales

Expanding capabilities
Only supplier to cover all technical standards for 1G and 2G systems (e.g. AMPS, CDMA)

Environment
EU selects GSM standard - based on NMT features GSM creates large market for Ericssons products GSM system - de facto world standard (mid-1990s)

The world's leading supplier 1994

Supplier North America
6,242,000 4,255,000 6,660,000 2,172,000 0 0 0 0 555,700

Europe

Asia/M.Ea st
2,203,300 1,538,900 731,300 0 2,059,600 0 380,200 600 1,000

Other

Ericsson Motorola Lucent T Nortel NEC Siemens Nokia Alcatel Other suppliers

6,696,800 1,669,000 0 303,900 0 1,354,900 781,600 475,500 74,000

1,967,500 347,200 45,700 331,000 198,000 48,000 16,700 2,500 16,200

Market Share % 17,109,600 42

7,810,100 7,437,000 2,806,900 2,257,600 1,403,500 1,178,500 478,600 646,900

Total

19 18 7 5 3 3 1 2

Ericsson - 3G systems

The strategic focus narrows further

Pulls out of lower-value added manufacturing (handsets) Focuses on systems integration and services

Capabilities
Ericsson/Nokia support W-CDMA standard W-CDMA incorporates new interface - backwards compatible with core GSM infrastructure

Environment
Ericsson involved with NTT DoCoMo consortium to develop WCDMA standard Experimental W-CDMA system in 1998; standard in Japan by 1999; Ist commercial introduction in Japan November 2001

Ericsson's weakness - mass production

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

Mobile phones - over-engineered and poor design Handset division slow to recognise market trends 'They are a bunch of engineers who couldn't care less what the phone looks like' Financial Times

Handset Division
manufacture outsourced to Flextronics Design - alliance with Sony (20 April 2001) to provide consumer electronics expertise

Ericsson's strength - CoPS

Mobile networks - 70% sales (2000)

highest R&D effort of system suppliers only supplier to cover all technical standards first supplier to introduce 1G, 2G & 3G strategic partnerships & acquisitions to fill gaps in capabilities (e.g. Qualcomm for CDMA)

Strengths
Systems integration, project managment and solutions (e.g. set up Ericsson Global Services)

Conclusions

Innovation in CoPS industries

Doesn't follow product life cycle dynamics Stability at systems integrator level Core capabilities in systems integration and project management

Other examples of long-term stability

Railways (Alstom, Siemens and Bombardier) Commercial airliners (Boeing vs. Airbus) Fixed telecoms (traditional suppliers - Nortel, Siemens, Ericsson - co-exist with new IP-based entrants e.g. Cisco and Ciena)