Industry Life Cycle

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Paper to be presented at the DRUID Summer Conference 2007
on

APPROPRIABILITY, PROXIMITY, ROUTINES AND INNOVATION
Copenhagen, CBS, Denmark, June 18 - 20, 2007

ENTERING A MATURE INDUSTRY THROUGH INNOVATION: APPLE S IPHONE STRATEGY Joel West San José State University joel.west@sjsu.edu *Michael Mace Rubicon Consulting mike@rubiconconsulting.com

Abstract: Innovation competencies are valuable in emergent and high-growth phases of the lifetime of a product or industry segment. For mature industries, researchers have emphasized strengths in operations and execution, with the implication that innovation-oriented companies must enter early in the product lifecycle or not at all. Here we examine the decision of Apple Inc. to enter the mobile handset business. We link the iPhone entry strategy to its historic competencies and the industry context of commodization and convergence. From this we offer conclusions about openness in mobile phones and prospects for a single dominant design for convergence devices.

JEL - codes: O30, L16, L1

Entering a Mature Industry Through Innovation: Apple’s iPhone Strategy Submitted to DRUID Summer Conference 2007 February 28, 2007 Abstract Innovation competencies are valuable in emergent and high-growth phases of the lifetime of a given product or industry segment. For mature industries, researchers have emphasized strengths in operations and execution, with the implication that innovation-oriented companies must enter early in the product lifecycle or not at all. Here we examine the decision of Apple Inc. to enter the mobile handset business. We link the iPhone entry strategy to its historic competencies and the industry context of commodization and convergence. From this we offer conclusions about openness in mobile phones and prospects for a single dominant design for convergence devices.

Few electronics-based industries have both the same scale and the ongoing rate of technological change as the mobile handset business. The industry was driven initially by rapid adoption in previously unserved major markets — first in Europe, then Japan, the U.S., and China, such that in 2006 more than 1 billion new handsets were sold. At the same time, the industry has seen ongoing technological change, both in the mobile telephone system (through the adoption of new technologies such as SMS, WAP, 3G, camera phones and now mobile TV) and in key component technologies such as LCD screens and rechargeable batteries. At the same time, developed markets have approached saturation as per capita adoption rates have exceeded 75% in these major markets. In such markets, network operators face steadily falling unit prices and must offer new services in hopes of increasing (or maintaining) average revenue per user (ARPU). Handset makers face similar challenges — commoditization of voice handsets and an imperative to offer ever more-capable phones to maintain high average selling prices in developed markets. The few remaining growth markets (such as China and now India) offer little consolation, as they feature highly price sensitive buyers and strong local competition. Throughout, handset makers face a unique distribution system, where even the most strongly branded firm must sell its phones in a given national market through one of three or four local operators: by one estimate, only 0.5% of the handsets sold in the U.S. are not sold directly an operator or its agents.1 Manufacturers thus face both high bargaining power by their main distributors, and the requirement to introduce new technology to align to their distributors’ business models.

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Despite such pressures, leadership in the mobile handset business has remained a remarkably stable oligopoly, with today’s market share leaders reflecting successful entry decisions made at the beginning of the cellular era. Motorola invented the portable cell phone in 1973, while both Nokia and Ericsson rode the rapid adoption of Nordic Mobile...
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