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

Andy Davies

Life cycles, firm strategies & industrial evolution

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

Overview

(page xvii, James Utterback, 1994)

Fluid Phase Transitional Specific Phase Phase

Product innovation

Process innovation

Product life cycle (PLC)

Rate of Major Innovation

Dominant design

'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)

PLC example

Periodic waves of radical innovation – New firms invade the traditional industry– Technical change is 'competence destroying'– Industry shakeout – Established firms develop the capabilities and

learning to bridge discontinuities

Discontinuities explain consumer goods:– decline of US and EU – rise of East Asian suppliers

Technological discontinuities

'This situation of limited product variety and innovation began to change during the 1970s…By 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)

Example of a discontinuity

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 - strengths & weaknesses

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 occur…Thus competitive strategies are likely to centre upon the design and development 'stages' of the conventional product life cycle' (Miller and Hobday et al, 1995)

PLC 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

Innovation in CoPS

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

Case of mobile communications

Base station

Base station

Controller (BSC)

Mobile switching

centre (MSC)

Mobile switching

centre (MSC)

Subscriber data base

Roaming data base

Base station

Controller (BSC)

Base station

Base station

Base station

Base station

Base station

Mobile communications system

Switching subsystem

Base station controller

Radio base station

Mobile handset

Operating subsystem

Products Production Users/markets

Mass produced

High volume

CoPS

• unit, small batch, large batch production of subsystems & components

• Project-based design & implementation of systems

Consumer goods

Mass marketing to final consumer

Business-to-business

Business users heavily involved in design and specifications

Firms

Ericsson

Motorola

Lucent T.

Nortel

NEC

Siemens

Nokia

Alcatel

Samsung

Qualcomm

Nokia

Sony/Ericsson

Motorola

Samsung, etc.

‘European suppliers…must reach levels of efficiency in production achieved by Asian manufacturers of high-volume consumer goods. The associated dynamics of manufacturing design and marketing of products 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%)

Mobile handsets - PLC dynamics

1G (1981)

Analogue

analogue transmission between handset & RBS FDMA - divides channels by range of frequencies

2G (1992)

Digital

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

3G (2001)

Wide-band

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

Generations of mobile systems

1981-83 1992-5 2001

NMT GSM W-CDMA

CDMA CDMA2000

AMPS D-AMPS

1G 2G 3G

Significant technological evolutionLimited technological evolution

Technical standards

New system generation phaseArchitectural phase

Rate of Major Innovation

• Archictectural innovation

• R&D efforts

• Development of standards

• Component & systemic innovation

• Product design and manufacture

• Project development and implementation

Life cycle dynamics

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

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 - 1G 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 Ericsson’s products– GSM system - de facto world standard (mid-1990s)

Ericsson - 2G systems

Supplier

North

America

Europe

Asia/M.Ea

st

Other

Total

Market Share

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

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

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

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

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

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

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

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

Other suppliers

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

The world's leading supplier 1994

The strategic focus narrows further– Pulls out of lower-value added manufacturing (handsets)– Focuses on systems integration and services

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

with core GSM infrastructure

Environment– Ericsson involved with NTT DoCoMo consortium to develop W-

CDMA standard– Experimental W-CDMA system in 1998; standard in Japan by

1999; Ist commercial introduction in Japan November 2001

Ericsson - 3G systems

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 weakness - mass production

Mobile networks - 70% sales (2000)– highest R&D effort of system suppliers– only supplier to cover all technical standards – first supplier to introduce 1G, 2G & 3G – strategic partnerships & acquisitions to fill gaps in

capabilities (e.g. Qualcomm for CDMA)

Strengths– Systems integration, project managment and

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

Ericsson's strength - CoPS

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)

Conclusions