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An Industrial Discontinuity

Case Aims: To illustrate how technological discontinuities can impact the performance of organisations

Following the invention of the telephone in the 1870s by Alexander Graham Bell, the core technology, accompanied by incremental innovation, remained virtually unchanged for over 100 years. The technological discontinuity in the 1980s was the development of the mobile phone. Initially the product was extremely expensive and mainly mounted in cars, only appealing to the business market. Motorola achieved market leadership, mainly because of a strong dominance in the United States. The other two big manufacturers were Ericsson from Sweden and Nokia from Finland, who launched their first handheld mobile phone in 1984 (Giachetti and Marchi 2010).

A major obstacle to rapid market penetration was distribution. Network operators had not developed their own retail channels and consumer acceptance of new products tended to be relatively slow because of uncertainty about the usefulness of new product technologies. Meanwhile dominant firms in the telephone market such as AT&T in the USA and British Telecom in the UK attempted to maintain their existing landline business model, ignoring the opportunities offered by entrepreneurial technological change (Binmore and Klemperer 2002).

The key factor in market expansion for the mobile phone was the establishment of a standardised system for signal generation in Europe, known as the Global System for Mobile Communication (or GSM). This standard created a common bandwidth that would facilitate pan-European roaming, established mass-market opportunities and reduced call costs. GSM became known as second-generation mobile phones (or 2G) and unlike early systems, used digital signal technology. This enabled the development of services, encryption of voice and data, additional capacity, reduction of the size of base stations and lower prices.

The launch of the digital technology marked two distinct technological discontinuities: the sudden redundancy of first-generation analogue devices and the rise of second-generation services and equipment. Nokia committed earlier than the competition to the emerging pan- European digital GSM mobile communication standard and started to build relationships with new independent mobile network operators. The size and weight of mobile phones shrank rapidly, which along with commercialisation of handsets, increased the number of network operators involved in consumer markets. To stimulate market expansion, network operators such as Vodafone began to purchase handsets from OEMs and then sold them to consumers through retail outlets (Doz and Kosonen 2008).

In the second half of the 1990s the size and weight of handsets continued to be reduced. Phone prices fell and network coverage was expanded,


making the mobile phone a mass-market product. By 1997 the biggest OEMs were Motorola, Nokia, Ericsson and the Japanese firm Panasonic. However in the 1990s Motorola began losing market share mainly because, despite the growing interest in digital technologies, the company had focused on the production and development of analogue devices for far too long. Firms such as Nokia contracted out supply-chain activities to specialist suppliers. This permitted (1) a reduction in fixed costs, (2) a reduction in time to market, (3) rapid development of new models and (4) access to the knowledge of their supplier partners.

As competition intensified most companies adopted a strategy based upon low price (Shi et al. 2006). For example, the majority of sales for Siemens were in low-tier, low-cost, low-margin products. Meanwhile Nokia, which had become the market leader, maintained a strategy based upon exploiting customer replacement demand. Three product technologies drove the replacement cycle: multimedia messaging service (MMS), colour displays and camera phones. Japan became the innovation centre where top OEMs first tested new technological features. This environment favoured Japanese OEMs, such as Panasonic, Sharp and Nec, which were able to counter international competitors by introducing features such as polyphonic ringtones, photo and video cameras. However weak brand recognition outside their home market resulted in Japanese OEMs being unable to gain a first-mover advantage over foreign competitors in overseas markets. Their product innovations began to be copied and used as a source of product differentiation by their biggest international rivals. At this stage, in order to stimulate the demand for replacement purchases, OEMs added to both low- and high-end handsets and offered new functionalities such as a digital camera, MP3 player, Internet connection, radio and a voice recorder. By the mid-2000s, these multi-tasking products had become the new dominant design.

By offering functionalities not related to basic voice communication capabilities, these OEMs were entering markets already populated by computer industry firms who have expertise in the management of information downloads and storage. The most successful was Apple, which launched the iPhone, a device combining voice, MP3 player and personal digital assistant (PDA) applications. Smartphones, electronic handheld devices that integrate the functionality of a mobile phone with PDA and other information exploitation appliances, are more expensive than the basic mobile phone, but the diversity of their applications and the services they deliver has resulted in huge profits for computer firms such as Apple, while OEMs such as Nokia have faced severe financial difficulties (Arbore et al. 2014).

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