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Evolution of firms' product strategy

over the life cycle of technology-based
industries: A case study of the global
mobile phone industry, 19802009
a a
Claudio Giachetti & Gianluca Marchi
a
Department of Business Economics , Universit di Modena e
Reggio Emilia , Modena, Italy
Published online: 21 Dec 2010.
To cite this article: Claudio Giachetti & Gianluca Marchi (2010) Evolution of firms' product strategy
over the life cycle of technology-based industries: A case study of the global mobile phone industry,
19802009, Business History, 52:7, 1123-1150, DOI: 10.1080/00076791.2010.523464
To link to this article: http://dx.doi.org/10.1080/00076791.2010.523464
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Business History
Vol. 52, No. 7, December 2010, 11231150
Evolution of rms product strategy over the life cycle of

technology-based industries: A case study of the global mobile phone
industry, 19802009
Claudio Giachetti and Gianluca Marchi*
Department of Business Economics, Universita di Modena e Reggio Emilia, Modena, Italy

Downloaded by [Northeastern University] at 18:19 23 November 2014
This paper adopts industry life cycle approaches to understand better the
changing rationales for product strategy development in the worldwide mobile
phone industry. Based on both primary and secondary sources, we nd that
mobile phone manufacturers have radically changed their product strategy over
the industry life cycle in response to various factors, such as the intense global
competition and the need to respond rapidly to changes in technology and mass-
consumer preferences. We also nd that, when the mobile phone industry entered
a stage of shake-out in the 2000s, contrary to the prediction of the classical
productprocess life cycle model, mobile phone manufacturers focused their
strategy not only on process but also on product innovations. The continuous
launch of new and advanced product technologies served mainly to stimulate the
demand for replacement purchases. We observe this unexpected key role of
product innovation to be very strong also in the stage of industry maturity.
Keywords: mobile phone industry; product strategy; industry life cycle; product
innovation; process innovation
Introduction
A large number of manufacturing technology-based industries have evolved over
time at an impressive speed, showing rapid transitions in terms of both product
features and manufacturers competitive dynamics. The mobile phone industry is
undoubtedly one of the most prominent examples. The global mobile phone industry
has faced dramatic changes since its birth. Rapidly changing market dynamics, such
as increasing market penetration, intense cost competition, rapidly shrinking
product life cycles and product customisation, have continuously shaped the
industry over time. Over the last two decades, the fast introduction of new product
technologies and the propensity for demand for products with rich and even
unrelated features have transformed the mobile phone into a multi-functional
device. The function of the mobile phone has in fact expanded outside its traditional
scope of providing pure telephone, or voice, capabilities to include an ever-growing
number of features and applications. In this fast-changing environment mobile
phone manufacturers have constantly reshaped their product strategies, introducing
new product features, widening their product portfolio, outsourcing core and
*Corresponding author. Email: gianluca.marchi@unimore.it
ISSN 0007-6791 print/ISSN 1743-7938 online

2010 Taylor & Francis
DOI: 10.1080/00076791.2010.523464
http://www.informaworld.com
1124 C. Giachetti and G. Marchi
non-core activities and strongly redrawing the relationships with all the actors
working in their ecosystem. Mobile phone manufacturers are also called original
equipment manufacturers (OEMs), and commonly refer to those rms that
manufacture handsets and mark them under their brand name (e.g. Nokia,
Samsung, Motorola). OEMs distinguish from network operators (e.g. Vodafone,
T-Mobile, O2): while the core business of the OEMs is handset production and
branding, network operators aim to attract paying consumers to services on their
networks by selling a bundle of OEM handsets together with telecommunication
services (e.g. monthly or yearly contract). This research is focused on OEM product
strategies, but during the analysis we will often refer to the network operators
behaviour because of the complementarities of handsets and telecommunication
services, and the growing competitive interaction among the two types of players.
A product strategy for a mobile phone manufacturer entails decisions on pricing,
product innovations (dened as changes in the characteristics of a handset, e.g.

technical features, design, style), product lines (e.g. basic phones, camera phones,
smartphones), product distribution (e.g. through manufacturers own retail channels,
network operators retail channels, other independent retail channels), and process
innovations (dened as changes in the way a handset is manufactured, created, or
distributed, e.g. outsourcing of activities along the supply chain to specialists).
Despite the topic of competitive dynamics in the mobile phone industry having
enjoyed signicant development in the management literature, few scholars have
used the industry life cycle (ILC) framework as a tool to describe the evolution of
mobile phone manufacturers product strategy over time. We argue that the analysis
of the evolution of the mobile phone industry with the lens of the ILC framework is
important for two reasons: 1) on the one hand the structural perspectives of the ILC
model help us to understand why OEMs have emphasised dierent strategies at
dierent periods in their evolutions; 2) on the other hand the peculiar characteristics
of the mobile phone industry, such as the technological convergence experienced in
recent decades and the continuous introduction of radical innovations repeatedly
changing the handset scope, allow us to increase understanding about some
anomalies of the standard ILC model itself previously shown by various authors in
the literature (Bonaccorsi & Giuri, 2000; Utterback, 1994).
The few empirical studies following this longitudinal approach have focused
mainly on the formation of strategic alliances (Rice & Galvin, 2006) and the
development of mobile phone technologies, technical standards and designs over time
(Hamil & Lasen, 2005; Koski & Kretschmer, 2007; Steinbock, 2003). However, little
has been said about competitive and contingent factors aecting mobile phone
manufacturers product strategy development over the industrys evolution. Accord-
ing to the ILC literature (Klepper, 1996, 1997; Utterback & Abernathy, 1975;
Utterback & Suarez, 1993), changes in demand growth and technology in fact have
implications for the industry structure, competition, source of competitive advantage
and in turn the rationales for product strategy development (Pessemier, 1982; Wind,
1982). Therefore, dierent ways of manufacturing, innovating, distributing and
promoting the product are often required through each stage of the industry evolution.
Based on both published material in newspapers, special magazines, manufacturers
annual reports and newsletters and several interviews with product and marketing
managers, this paper aims at understanding, with the lens of the ILC framework, the
main factors that have exercised inuence on the global mobile phone manufacturers
product strategy development, from the introduction of the rst analogue handheld
Business History 1125
device for business users in the 1980s to the recent technological convergence that has
transformed the mobile phone into a mass-market multi-tasking product.
This study oers several contributions. First, this is the rst study describing the
evolution of mobile phone manufacturers competitive dynamics over such a long
period of time (19802009). Second, we use a wide variety of data, from both
primary and secondary sources, that allow us to oer a clear and well dened picture
of the industry life cycle stages. Third, with the historical perspective here adopted
we are able to understand better the changing rationales for product strategy
development in the worldwide mobile phone industry. Fourth, we nd that not all
the industry dynamics we have observed in the evolution of the mobile phone
industry t with the classical ILC model (Abernathy & Utterback, 1978; Klepper,
1997; Utterback & Suarez, 1993). Specically, contrary to the main prediction of the
classical productprocess life cycle model (Abernathy & Utterback, 1978), over the
whole (analysed) time period we observed a persistence of competitive changes

driven primarily by investments in product innovation.
Product strategy and the industry life cycle

Industry life cycle models aim at integrating technological, rm and industry
evolution in terms of trajectories and outcomes that can be exogenously observed
(Klepper, 1997; Suarez & Utterback, 1995). Product strategy deals with how the
product is produced, designed, distributed, promoted and innovated over time
(Pessemier, 1982; Wind, 1982). The rms product strategy concept has often been
described as part of the ILC framework: according to the ILC literature the rms
product strategy changes as the industry dynamics evolve over time. The ILC
provides an invaluable perspective on the development of the rms product strategy,
as each phase of the life cycle introduction, growth, shake-out, maturity and decline
has distinct characteristics that aect a rms operation (Klepper, 1997; Lee & Veloso,
2008; Levitt, 1965; Pessemier, 1982; Stig, 2009). Dierent product strategies are often
required through each stage, as consumer attitudes and needs, the market concentra-
tion and the rms supply chain relationships change through the course of the industry
evolution (Calantone, Garcia, & Droge, 2003; Dosi, 1982; Rosenberg, 1972).
Abernathy and Utterback (1978) link industry evolution to the pace of product
innovation and the pace of process innovation. They argue that, in the initial phases
of a new industry, when a product is still new to the market and the demand is still
low, companies experiment and try to dierentiate strategically mainly via product
innovation. The closer the industry is to a stage of maturity, the higher the demand
saturation and the greater the product knowledge of consumers (Utterback &
Suarez, 1993). In this stage rms are predicted to dierentiate along other strategic
dimensions than product innovation, such as price (Abell & Hammond, 1979),
service or process innovation (Abernathy & Utterback, 1978).
However, this industry life cycle model does not hold for all industries
(Utterback, 1994). For instance, sometimes a technological discontinuity
interrupts the maturation of certain products and the cycle starts over again
(Tushman & Anderson, 1986) or non-shake-out patterns emerge (Bonaccorsi &
Giuri, 2000). In addition, as we have seen in technology-based industries such as
personal computers, some rms may focus on process innovation as a source of
competitive advantage (e.g. Dell) while other competitors may choose a dierent
strategy and continue to focus on design innovation (e.g. Apple). Nonetheless, this
stylised life cycle model has become an important framework in management

literature to help scholars and managers to think about what strategies companies
should emphasise at dierent periods in their evolution and in dierent competitive
environments (Porter, 1980). In this study it is not our intent to make predictions
about the industry evolution using the ILC framework. Instead, we use this
framework for its descriptive strength, in order to nd possible explanations of rms
behaviour at any given time in an industry.
Because of its rapid and continuous evolution the mobile phone industry oers a
very interesting dataset to analyse how rms respond to market changes over time.
We, therefore, pose the following two research questions.
(1) Which factors better explain the evolution of product strategy formation of
mobile phone manufacturers?
(2) Are the factors that better explain the changing rationale for product strategy
formation in the mobile phone industry in line with the industry life cycle
framework?
Research methodology
Research design and data collection
We investigate the product strategy evolution of mobile phone manufacturers that
covered relevant market positions in the 19802009 period. We divide the analysis
into various temporal stages, each stage representing a phase of the industry life
cycle. In each phase we focus on how the manufacturers product strategy evolved
and on the main factors explaining the changing rationale for product strategy
formation. The rms in our sample represent more than 90% of the global market.
This paper draws upon a range of several sources to discuss the evolution of the
global mobile phone manufacturers product strategy. Primary sources include:
. eleven telephone semi-structured interviews with product and marketing

managers of some of the mobile phone manufacturers that have occupied
worldwide relevant market positions over the last two decades.
Secondary sources include:
. the major mobile phone manufacturers annual reports and newsletters from
the beginning of the 1980s until 2009. Our archival data include mainly Nokia,
Motorola, Samsung, LG, Sony, Ericsson, Sony-Ericsson, Siemens, BenQ,
BenQ-Siemens, Alcatel, Panasonic, Nec, Philips, Sagem, and Apple;
. the FACTIVA database, which searches more than 9000 sources, including the
Wall Street Journal and the Financial Times, and has often been used by other
researchers for searches on business-oriented media;
. a comprehensive dataset comprising information on mobile phone handsets
introduced globally between 1997 until 2009. Data were collected from special
interest web pages for mobile telephony, such as http://www.gsmarena.com
and http://mobile.softpedia.com, providing information on technical features
and the month of introduction of handset models launched in the marketplace
by the major mobile phone manufacturers from 1997;
. books, newspapers, press releases and business publications.
Data analysis
The data analysis was partially planned and partially emerged as the study
progressed. Throughout the analysis, we shifted back and forth between the raw data
and the patterns emerging from the data. Therefore, the analysis took an interactive
rather than a linear path but for simplicity is presented here in distinct stages:
Stage 1
A rst analytical step was to dene the industry in terms of players and products,
and see how the industry structure, technologies and competitive dynamics have
changed over time. This would serve to identify a sequence of stages over the
industry evolution. We began by collecting data and information from books,
newspapers and business publications.
Stage 2
The second stage of analysis was aimed at understanding the main factors
characterising mobile phone manufacturers product strategy over the last two
decades in terms of manufacturing, distribution, promotion and innovation. We
collected data from manufacturers annual reports and newsletters, newspapers and
business publications to understand similarities and dissimilarities among manu-
facturers strategies over time. We then wrote detailed case studies (Yin, 2003) on
each manufacturer, with the aim of keeping track of their main strategic moves over
the last two decades. The case studies were 10 to 15 pages in length and included
informant quotes as well as tables and timelines summarising the key strategic
behaviours of each rm. We used a temporal breaking strategy (Langley, 1999) to
distil changes in product strategy formation from the cases. The temporal breaking
strategy involves identifying time periods, or phases, within a process. In this study
phases were demarcated by radical changes in product strategy.
Stage 3
The third stage of analysis involved the questionnaire development. The aim of the
questionnaire was to triangulate secondary sources with in-depth interviews with
industry practitioners. The questionnaire was structured in three parts: the rst part
related to the manufacturers historical growth in the worldwide mobile phone
market, with a particular focus on manufacturing, distribution, promotion and
innovation processes; the second part focused on the manufacturers relationships
with other players operating in the mobile phone ecosystem, such as suppliers,
distributors and competitors; nally, the third part dealt with the manufacturers
strengths and weaknesses in the modern marketplace.
Stage 4
Once the questionnaire was set, in the fourth stage of analysis we developed a list of the
mobile phone manufacturers that have covered worldwide relevant market positions
over the last two decades and we contacted their marketing and product managers. We
used personal contacts and public databases to identify suitable candidates. Out of the
initial contacts, we received positive responses from 11 managers (around 50% of the
initial list). From April 2008 to May 2009 we conducted telephone interviews. The
questionnaire was sent to the managers by email before the telephone interviews.
Companies whose executives agreed to be interviewed include: Samsung, LG,
Motorola, Sony-Ericsson and Nec. Each interview lasted approximately 6090
minutes.
Stage 5
In the nal stage of analysis we used information gathered from the interviews to
integrate into the previous case studies. This allowed us to build a chronology of the
rationales for product strategies formation from the 1980s to 2009, in each of the
stages of the industry life cycle.
Mobile phone industry denition

Nowadays the mobile phone industry is part of a complex ecosystem, which includes
four main groups of players (Figure 1): mobile network operators, original
equipment manufacturers, OEMs suppliers and mobile phone independent retailers.
OEMs commonly refers to those rms that manufacture handsets and mark them
under their brand name. Network operators aim to attract paying consumers to
services on their networks. Network operators oer services by building networks on
which they carry voice and data. For this purpose they purchase stocks of handsets
by OEMs and then sell them to consumers. Handsets are also sold to consumers by
independent retailer chains, some of them commercialising only handsets and others
selling handsets as part of a much wider assortment. Therefore, OEMs nowadays
behave more like wholesalers than retailers, because consumers purchase handsets
mainly from network operators retail channels (together with a contract to use the
handset on their network) or from independent retail chains.
OEMs can outsource a number of activities to third parties. Some of them are
suppliers of components (chips, software, operating systems, etc.), others assemble
Figure 1. The mobile phone ecosystem.

Source: Our elaboration.
electronic components and devices on behalf of their OEMs (electronic manufactur-

ing service providers EMS providers) and others are independent contractors that
develop prototype handsets and sell them to OEMs which in turn market them under
their brand names (original design manufacturers ODMs).
However, the mobile phone ecosystem has changed greatly over the years.
During the 1980s there were two main actors in the market: 1) OEMs, which
presented a vertically integrated supply chain with very few outsourced activities and
produced and commercialised handsets directly to consumers (only business users)
and 2) network operators, working only as telecom services providers.
Manufacturers product strategy evolution over the industry life cycle

The 1980s: the introductory stage
The commercial origins of mobile phones can be dated to the US in the early 1980s,
when the rst analogue systems appeared. In this process, the Federal Communica-
tion Commission (FCC) approved the Advance Mobile Phone System (AMPS) as a
common standard. The introduction of such a common standard had two main
objectives: to allow interstate roaming and handset compatibility (Fuentelsaz,
Macas, & Polo, 2008).
The map of global mobile phone standards was very country-specic in the early
1980s. While the United States adopted the AMPS, the UK introduced the Total
Access Communication System (TACS), derived from the American version. North
European countries developed the pan-Nordic Nordic Mobile Telephone (NMT),
Germany, France, Italy and Japan, instead, had their own indigenous systems
(Blackman, Cave, & David, 1996). At that time, OEMs produced handsets that
worked for only a certain number of systems since the required investment in several
systems was considered too high, even by the biggest players. Today those handsets
working with AMPS, TACS and NMT are commonly called rst-generation mobile
phones (1G). Technically they all used an analogue signal.
In 1982 the European Conference of Postal and Telecommunications Admin-
istrations (CEPT) launched a programme for the standardisation of the second
mobile phone generation: the Groupe Speciale Mobile (GSM), later translated to the
Global System for Mobile Communication. The objective was to create a common
bandwidth that would facilitate pan-European roaming, create mass markets that
would result in cheaper calls and adopt the latest available technology.
Until the end of the 1980s the mobile phone was an expensive piece of equipment
mainly mounted in cars. OEMs were vertically integrated conglomerates that sold
the product directly to consumers. Due to their extremely high prices, mobile phones
were products only for the business market. Network operators played almost no
role in mobile phone commercialisation, gaining limited cash ow from mobile
phone calls (Steinbock, 2001). The OEM market was very concentrated: Motorola
held the worldwide leadership, mainly because of its strong dominance in the United
States market, at that time the biggest one. By 1982 the company saw the cellular car
telephone market as a key opportunity. It had invested more than $100 million of
engineering and manufacturing resources in pursuit of this new market. In 1983
Motorolas rst analogue portable mobile phone was brought into commercial
operation. The other two big manufacturers were Ericsson from Sweden, which
turned out its rst handheld mobile phone in 1986, and Nokia from Finland, which
launched its rst handheld mobile phone in 1984. By acting as a pioneer in the
mobile phone industry, Motorola was able to gain a substantial rst-mover

advantage over rivals, throughout the 1980s, in terms of both capabilities and
market position.
The competitive dynamics and the industry structure of this initial stage of the
mobile phone industry evolution are in line with the classical ILC models
(Abernathy & Utterback, 1978; Klepper, 1997). As also observed in many other
sectors, in this stage sales were relatively low (Pessemier, 1982). The major
marketing obstacle to the rapid introduction of a product was distribution. In fact
network operators had not developed their own retail channels yet. Consumer
acceptance of new products tended to be relatively slow because of consumer
uncertainty about the usefulness of new product technologies (Klepper, 1997; Lee
& Veloso, 2008; Levitt, 1965; Stig, 2009). Finally there were very few competitors
(Schewing, 1974).
First half of the 1990s: the rst growth

The GSM was launched in Europe in 1991. Handsets working with GSM were
commonly called second-generation mobile phones (2G). The GSM, contrary to
the analogue systems, uses a digital signal. The digital system enables the
development of services, encryption of voice and data, additional capacity,
reduction of the size of base stations and lower prices. The GSM was introduced in
the United States in 1995, and it worked together with the AMPS (Paetsche, 1993).
The launch of the digital technology marked two distinct technological
discontinuities: the sudden redundancy of rst-generation analogue devices and
the rise of second-generation services and equipment. By understanding the
analoguedigital system discontinuity, and how the company could benet from it,
Nokia was encouraged to commit earlier than its rivals to the emerging pan-
European digital GSM mobile communication standard, to focus on base station
development in the GSM European R&D alliance, and eagerly to start building
relationships with the newly franchised independent mobile network operators
(Doz & Kosonen, 2008).
Meanwhile, the development of handsets surprised nearly everyone. The xed
carphone model was liberated from the car and became portable. Size and weight
shrank and, despite mobile phones still being exclusive products mainly for the
business market, the number of subscribers among individuals also grew faster than
anyone could have anticipated. The commercialisation of handsets to the consumer
market was in great part favoured by the increasing number of network operators
retail channels. Network operators aimed to attract paying consumers to services on
their networks and for this purpose they began to purchase stocks of handsets by
OEMs and then sold them to consumers through their retail chains. Moreover, the
GSM system allowed OEMs to introduce additional product features that in the
following years became technical standards: the Short Messaging Service (SMS),
for example, was just an appetiser for things to come.
In this growth phase of the industrys evolution, as predicted by the classical ILC
models, product technologies (e.g. operating systems, keyboard functionality,
software applications and also aesthetics) diered widely (Abernathy & Utterback,
1978; Utterback & Suarez, 1993), since OEMs were not able to fully understand
customer expectations about product features, and then focused internally on the
development of new inventions.
Second half of the 1990s: the second growth

The leadership of Nokia in the digital standard and the entry of new competitors
The mobile phone revolution started in the mid-1990s (Rice & Galvin, 2006;
Steinbock, 2003). While up until then the construction of networks and handsets
continued to grow at a steady pace, the market was still largely a domain for business
users. In the second half of the 1990s the size and weight of handsets was further
greatly reduced. At the same time prices dropped and network coverage expanded,
making the cellphone a mass-market product in most developed countries. Driven by
the popularity of digital mobile phones, worldwide sales of mobile telephone
terminals to consumers reached 160 million units, an increase of 50% over 1997.
Digital mobile phone sales surpassed analogue phones in 1998, as digital accounted
for 84.6% of total mobile phone sales.
As predicted by the ILC model, the prot associated with the growth stage
attracted other competitors to the product market (Klepper, 1997; Utterback &
Suarez, 1993). In 1997 the biggest OEM was Motorola of the United States, with a
global market share of 23.5%. Other players with relevant market positions were
Nokia of Finland (19.1%), Ericsson of Sweden (14.8%) and Panasonic of Japan
(8%) (Figure 2). Followers were Siemens of Germany, Samsung of South Korea,
Alcatel of France, Philips of the Netherlands, Sony and Nec of Japan and Sagem of
France. Starting from the beginning of the 1990s Motorola began losing market
share mainly because, despite the growing interest in digital technologies, it had
focused on the production and development of analogue devices for too long. The
resulting excess capacity together with exit barriers from the production of analogue
devices strongly aected the rms sales and protability, making the transition to
digital standards slower and more costly. Instead, contrary to Motorola and many
other OEMs, Nokia was able to catch the transition to digital standards quickly,
having focused investments on 2G mobile phones from the beginning of the 1990s
Figure 2. Global market share (in terms of units sold) of the major OEMs (19942009).
Source: Our elaboration from Gartner Dataquest (2009).
(Dittrich & Duysters, 2008; Steinbock, 2003). Because of its rapid response to
changes in technologies and consumer preferences, the Finnish OEM became the
worlds largest manufacturer of mobile phones, surpassing the industry giant
Motorola, in 1998 (Figure 2).
Product innovation calls for process innovation

A signicant step in the evolution of mobile phones took place when they became
truly pocket-sized. The role of design was suddenly a determinant of a models
success. Earlier, design had been governed by ways of tting the phone comfortably
inside the car. Starting from the second half of the 1990s, the phone became an
independent item to be displayed, a reection of the users personality. Handsets
were progressively miniaturised until they could t a pocket or a handbag.
As handsets became consumer goods, users began to ask for special features. The
most revolutionary feature diused among mobile phone models in the second half of
the 1990s was the capability of sending text messages. The SMS, a text-messaging
feature of GSM digital cellular phones, became a vibrant business and social
phenomenon, especially in Europe, where teens quickly made it their own (Le Bodic,
2005). By the mid-1990s most handsets were equipped with proper keyboards, enabling
the user to input not only numbers but also letters and various characters. Some
manufacturers also oered group messaging capabilities where messages are broadcast
to several users simultaneously, creating a sort of mobile chat room. At the end of the
1990s, almost all new handset models were capable of sending SMS messages.
In 1997 mobile phones were equipped with video games. The rst game that was
pre-installed onto a mobile phone was Snake on a selected Nokia model. Snake and
its variants, installed on almost all Nokia models, soon became very popular all over
the world. Given the success of mobile games, especially among teenagers, most OEMs
tried to emulate Nokias success by establishing relationships with game designers.
Based on Internet technologies, in 1999 the rst wireless application protocol
(WAP) was introduced. The WAP originated from several years of cooperation among
OEMs (Nokia, Motorola and Ericsson), network operators and local authorities.
With the introduction of the WAP users could access personal web pages with a micro
browser and congure the services they could receive through the phone. These
included specic information, lists of numbers for group messaging, personalised ring
tones and stylised postcards that could be sent to ones own or a friends phone.
As mobile phones were increasingly packed with new features, manufacturers
began to work more closely with content producers, games designers and the
entertainment industry. Using the handset as a general-purpose terminal, the rise of
SMS, mobile chatrooms, WAP-based applications, games and so many other
product innovations had worldwide pioneering signicance. Most of these can be
traced by Nokia (Table 1), and this is probably what allowed the company to
reinforce its worldwide leadership over time.
The rush to introduce new features and applications forced OEMs to support
increasing R&D expenditure. Most of the OEMs then began to outsource the
manufacturing of components and applications to contract manufacturers in order
to focus on more value-added activities and benet from economies of scale. These
contract manufacturers, also known as electronic manufacturing services (EMS)
providers, assembled electronic components and devices on behalf of their OEMs.
EMS providers originated mainly from the computer industry or from computer
Table 1. Main product technologies introduced by OEMs.
Product technology Firms introducing the technology* Year of introduction

Second half of the 1990s
Voice dial Philips 1997
Composer Ericsson 1997
Infrared Nokia 1997
Games Nokia 1997
Downloadable ring Nokia 1998
Email client Nokia 1998
WAP Nokia 1999
First half of the 2000s
Polyphonic ringtone Panasonic 2000
SMS chat Nokia 2000
MP3 Samsung and Siemens 2000

Bluetooth Ericsson 2001
Colour screen Nokia and Ericsson** 2001
MMS Motorola 2002
Photocam Sharp 2001
Videocam Nec 2003
Wi-Fi Motorola 2004
Second half of the 2000s
iTunes Motorola 2005
GPS Samsung 2007
Notes: *The rst rm adopting the new product technology in its portfolio.
**A couple of phone models capable of displaying only four colours were introduced by Siemens in 1997.
However, the rst phones capable of displaying a complete range of colours (more than 200 colours) were
introduced in 2001 by Ericsson and Nokia.
peripherals. Because the worldwide EMS providers market was very fragmented,
OEMs were able to exert a strong bargaining power, which resulted in very low
prices of outsourced components and assembling activities.
The outsourcing of a number of activities to EMS providers, content producers and
game designers was the rst move of OEMs toward process innovation. As also
predicted by the ILC theorists, as the industry grows and the product diuses among
consumers, rms, in order to benet from economies of scale, invest more and more on
process innovations (Utterback & Abernathy, 1975), often outsourcing to specialists
the least value activities (Utterback & Suarez, 1993). By contracting out various
activities along the supply chain to specialists, OEMs were able to 1) reduce some of the
xed costs related to the handset production, 2) reduce the time to market, accelerating
the development of new models, and 3) access to the knowledge of the partners.
Tables 2 and 3 summarise the key factors in the evolution of OEM product and
process innovation, including those we have described so far.
Segmentation as a basis for dierentiation

As momentum in mobile cellular phones shifted closer to the consumer market,
segmentation accelerated accordingly. ILC theorists suggest that as the product
diuses in the market, rms have to cope with an increasingly heterogeneous demand,
due to a growing consumer knowledge on product attributes and their impact on
choice decision (Klepper, 1997; Pessemier, 1982). Increasing segmentation served
1134
Table 2. Key factors in the evolution of OEMs product innovation.
Mobile phone
industry variables 1980s First half 1990s Second half 1990s First half 2000s Second half 2000s
Key oering for Availability Portability Design in line with Service/experience Service/experience
consumers the consumer lifestyle (multi-tasking) (multi-tasking)
Status
Main product Analogue system GSM digital WAP Colour display, Smartphone features
technologies systems Games MMS, camera, (e.g. advanced OS,
introduced into SMS (still in the Diusion of SMS MP3 player fast Internet
the market infant stage) UMTS technologies connection, touch
screen)
C. Giachetti and G. Marchi
Main elements of None: OEMs oer Portability: Games, WAP Multi-tasking Aesthetic, design,
product many dierent smaller and Segmentation based products fashion;
dierentiation versions of mobile lighter handsets on the product Wide product range OEMs brand image
phones; most of GSM digital design/aesthetic
them are mounted system Wide product range
in cars SMS
Dominant design None Portable handsets Miniaturisation Dominant design not Multi-tasking: camera,
(product features well dened (device colour display, MP3,
widely diused diversity): basic phones etc.
among OEMs) vs. multi-tasking devices
Technical standard Analogue system Discontinuities: analogue GSM digital system GSM digital system GSM digital system
and digital systems SMS SMS SMS, MMS
Product scope Voice capabilities Mainly voice capabilities Voice text capabilities Mainly voice text Voice text capabilities
(SMS introduction and (SMS fast diusion) capabilities (camera, MP3 camera MP3
very slow diusion) and Internet mobile were Internet mobile
emerging)

Table 3. Key factors in the evolution of OEMs process innovation.
Mobile phone
industry Second half
variables 1980s First half of 1990s Second half of 1990s First half of 2000s of 2000s
OEMs supply OEMs sell products OEMs sell products 1) OEMs sell products Network operators A growing
chain directly to consumers directly to consumers to consumers through begin having their number of
relationships and network operators or 2) through the rst the network operators own branded network
with network play no part in the network operators retail channels (network handsets. These operators have
operators process retail channels operators buy stocks of handsets are still their own
OEMs produce OEMs produce handsets from OEMs, supplied by OEMs branded
handsets for a limited handsets for a and sell them to and ODMs handsets. These
number of growing number of consumers) handsets are
telecommunications telecommunications still supplied
standards standards by OEMs
and ODMs
OEMs supply OEMs outsource OEMs outsource Increasing numbers Increasing numbers OEMs
chain components and components and of OEMs outsource of OEMs outsource outsource
relationships assembly to very few assembly to very few the manufacturing of assembly and design assembly and
with suppliers suppliers components and of handsets to design of
suppliers Suppliers as a support Suppliers as a applications to ODMs and EMS handsets
(ODM, EMS to the OEMs support to the suppliers providers to ODMs and
providers, chips production process OEMs production Suppliers as Suppliers as EMS providers
and OS makers, process cooperators in the strategic partners Suppliers as
etc.) OEMs production in the OEMs strategic
process production process partners
in the OEMs
production
process
OEMs supply Integrated Integrated Integrated and semi- Mainly semi-integrated Mainly semi-
Business History
chain business integrated integrated

model

1135
OEMs as a basis for dierentiation. Equipment manufacturers were struggling to

design handsets for all the actual consumer segments, from mono-colour elegant
business style to colourful interchangeable plastic covers for fashion-conscious teens
and easy-to-use models for the 12-year-old set. Because some of the most requested
features by consumers, such as SMS, no longer distinguished mobile vendors,
consumers purchased phones that suited their dierent lifestyles. Of course both
features and design contributed to the rapid growth of the mobile subscriber base, but
the transition of the mobile phone from a business niche device to a global consumer
product required a new marketing approach: everyone was a potential mobile phone
consumer. As the market became increasingly segmented, the ability to master
various product categories became crucially important (Haikio, 2002).
In turn, the need to use segmentation as a way of dierentiating pushed OEMs,
especially the biggest ones, to widen their market portfolio greatly in each of the
served market segments. We nd that the average number of new models introduced
to the global market by OEMs increased from three in 1997 to seven in 2000 (Table 4).
First half of the 2000s: the shake-out

The economic downturn and the war of prices of entry-level phones
Worldwide mobile phone sales between 1996 and 2000 experienced a compound
annual growth rate close to 60%, but in 2001, for the rst time in its history, the
mobile phone industry suered a drop in unit sales. Mobile phone sales were
somewhat depressed by the US economic recession starting in 2000 and exacerbated
after 11 September 2001. The weakened consumers purchasing power shifted
demand towards low-price handsets. The most common strategy followed by OEMs
in order to respond to the sales slowdown resulted in aggressive pricing of entry-level
phones. Most of those manufacturers that were not able to be competitive in this
segment faced losses in market share. For example, over the rst half of the 2000s,
the majority of sales for Siemens were in low-tier, low-cost, low-margin products,
and this helped the company to record very strong growth. Siemens products were
ideally suited to emerging Eastern European markets, especially Russia. Its sales
further strengthened as it took full advantage when some competitors were unable to
meet that market demand. Similarly Nokia, the market leader, was able to maintain
Table 4. New mobile phone models introduced every year by OEMs to the global market.*
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
TOTAL 32 47 45 76 74 89 184 239 323 266 270 273
Annual 46.9 74.3 68.9 72.6 20.3 106.7 29.9 35.1 717.6 1.5 1.1
growth
(%)
Mean 2.9 4.3 4.1 6.9 6.2 8.1 15.3 19.9 26.9 24.2 24.5 30.3
Median 2.0 3.0 4.0 7.0 5.5 7.0 11.5 17.5 22.0 18.0 19.0 25.0
Industry 2.3 2.7 2.2 3.4 4.0 4.8 10.7 9.5 17.5 21.6 24.5 22.8
SD
No. of 11 11 11 11 12 11 12 12 12 11 11 9
OEMs
Note: *The analysis takes into account only products introduced by Nokia, Motorola, Samsung, LG, Sony,
Ericsson, Sony-Ericsson, Siemens, BenQ, BenQ-Siemens, Alcatel, Panasonic, Nec, Philips and Sagem.
a strong leadership due to price cuts, especially in basic models. Motorola, instead,
maintained the second position based on its strong performance in the North
American and Chinese markets, but its decision not to launch a wide range of basic
low-cost handsets in Western Europe was the main cause of losses of market share in
this area. Dierent was the case of Samsung and LG, which continued to gain
market share by investing mainly in mid-to-high-end cellular phones (Hu & Hsu,
2008), with the aim of positioning their brands in the luxury segment (Figure 2).
Although over the rst half of the 2000s various OEMs were launching a wide
range of new handsets with innovative features such as gaming, music and video, the
majority of worldwide sales remained in the low-tier, low-function segment. The shift
to lower-end phones dramatically lowered barriers to market entry.
The demand slowdown and the increasing turnover of rms (that we will analyse
below in more detail) marked a period of shake-out (Klepper, 1996, 1997). Still, as
we shall see below, in this stage of the industry evolution we nd that some of the
OEMs competitive dynamics do not t with the classical ILC framework.
The quest for a replacement market: the unexpected key role of product innovations
The highly penetrated nature of the Western European and US markets in the rst
half of the 2000s (Figure 3) meant that future mobile terminal sales growth had to
come from replacement purchases.
Three product technologies mainly drove the replacement cycle across these
years: multimedia messaging service (MMS), colour displays and camera phones.
The very function of the handset was clearly changing. Certainly, it served as a
traditional phone, but the constant introduction of new features made it possible to
use it as a multi-tasking device (Table 2).
The increasing presence of the mobile as a commodity encouraged the
development of a new technology in 2003, the Universal Mobile Telecommunica-
tions System (UMTS), which was expected to substitute for GSM quickly, to oer
both a wider range and a higher quality of services, such as wide-area wireless voice
Figure 3. Mobile phone subscribers per 100 habitants (19932008).

Source: International Telecommunications Union, http://www.itu.int/en/pages/default.aspx
telephony, video calls and broadband wireless data, all in a mobile environment
(Henrik, 2001). However, and in spite of its promising possibilities, the development
of UMTS was not as rapid as expected and, at the end of 2005, GSM was still the
dominant technology in the mobile world (Fuentelsaz et al., 2008). Mobile phone
users were not prepared to use most of the main product functionalities supported
by UMTS, such as the video calls (mainly for privacy and cost issues). This
translated into a low demand for devices equipped with the UMTS technology.
Therefore, mobile phones set with UMTS technologies, commonly called third-
generation mobile phones (3G), did not signicantly contribute to the growth of a
replacement market in the US and especially in Western European countries.
In 2005 the global market was clearly split into two mature markets. There was
the replacement market in regions such as Western Europe and North America
where network operators subsidised enhanced handsets, and consumers were willing
to upgrade to devices with more features, especially camera phones with a colour
display, and emerging markets such as Africa, parts of Eastern Europe and China,
where new sales were fuelling customer demand. In both markets the increasingly
shorter product life cycle of mobile phones led to strong product discounting. This
made it easier for consumers to pick up more advanced technology at a lower price,
and in turn put pressure on manufacturers margin and protability.
Although the price was a key competitive tool, the speed of introduction of new
product features was also for OEMs an important source of competitive advantage.
Japan became an innovative centre where top OEMs rst tested new technological
features. This environment favoured the innovation processes of Japanese OEMs,
such as Panasonic, Sharp and Nec, which were able to anticipate the biggest
competitors in the introduction of revolutionary features such as polyphonic
ringtones, photo and video cameras (Table 1). Notwithstanding, because of their
weakened brand recognition outside their local highly saturated market, Japanese
OEMs were not able to gain a rst-mover advantage over foreign competitors, and
their product innovations quickly became copied and used as a source of product
dierentiation by the biggest rivals.
At this point of the analysis we nd that some competitive dynamics begin to
diverge from trajectories as predicted by the ILC framework. While according to
Abernathy and Utterbacks model (1978) in a stage of shake-out rms are usually
expected to reduce the rate of product innovation in favour of process innovation,
the continuous introduction of new revolutionary handset features over the rst half
of the 2000s does not corroborate the ILC prediction. Process innovations continued
to play a key role in OEMs product strategy, but always together with an
unpredicted upsurge of product innovations (Table 2). Furthermore, MMS, colour
displays and digital camera had a radical impact on the products scope: they
fundamentally altered the way consumers used their mobile phone, and rendered
obsolete, or drastically reduced the competitiveness of, those mobile phones that did
not incorporate them. Therefore, it is interesting to notice that the dominant design
predicted by the classical ILC model in the stage of shake-out (Utterback & Suarez,
1993), in the context of the mobile phone industry was still fuzzy. In fact, because of
the continuous introduction of product innovations, OEMs product portfolio
diered widely. As also noted by some of the managers we interviewed, although the
GSM standard ensured compatibility among handsets in terms of the basic functions
(phone call, SMS), the mobile phone market over the rst half of the 2000s was
clearly characterised by device diversity: while some OEMs, due to high R&D
capacity, were able to enlarge their product portfolio with a wide range of new
advanced handsets with features such as gaming, music and video (e.g. Nokia,
Motorola, Samsung and LG), other manufacturers continued to serve mainly the
low-end market with very basic phones (e.g. Alcatel). Therefore the shake-out was
not triggered by the rms convergence around a dominant design. Firms that failed
were not those that were not able to make a transition toward greater product
standardisation, but those that were not able to serve the very heterogeneous market
segments, by oering both high- and low-end phones.
The de-verticalisation of OEMs supply chain as a way to innovate processes

While during the late 1990s and early 2000s, many of the minor European players
exited production either through sale or closure, new players from Asia ventured
into the eld. They were mainly low-cost manufacturers from China and Taiwan (Jin
& Zedtwitz, 2008). Table 5 provides an overview of the evolution of the industry
concentration, together with the number of rms entries and exits. As can be
observed, the rms turnover, here measured as the (yearly) average number of
entries and exits over the ILC stage (Cabral, 1997; Caves, 1998), began to grow
signicantly in the rst half of the 2000s. From 2001 until 2006 we nd 18 new rms
entries and 9 exits, with respect to the 10 new rms entries and 2 exits in the second
half of the 1990s (19962000).
The main causes of OEM turnover were: 1) the inux of new competitors that
pushed down the average selling price of mobile phones, hitting the margins of the
established OEMs like Nokia, Motorola and Samsung, 2) the demand slowdown,
reducing the OEMs revenue potential, and 3) the inability of several OEMs to cope
with the unpredicted upsurge of product innovations we described before.
In line with Abernathy and Utterbacks (1978) prediction, where OEMs were
able to internalise all of the design, production and distribution activities in the 1980s
and 1990s, a period where competition was not so intense, over the 2000s the
growing rivalry among players and the changing nature of products led the industry
to a stronger focus on core business activities and to the adoption of less vertically
integrated business models (Table 3).
At rst, to benet from economies of scale and withstand the price variations,
OEMs outsourced more and more manufacturing and assembling activities to EMS
providers. For example, Sony-Ericsson, an OEM born in 2001 from the joint venture
between Ericsson and Sony, outsourced most of its manufacturing to Flextronics
International, a Singapore-based EMS provider. Nokia, which was traditionally
vertically integrated, outsourced about 15% of its assembling and manufacturing
activities to Flextronics, Solectron (US) and Elcoteq (Finland). Other OEMs such as
Motorola, Alcatel and Siemens also began to outsource part of the production
process (Table 6). The advantage of outsourcing to EMS providers was that it left
the OEM free to focus on its core strengths: product R&D, sales and marketing.
The rush of some OEMs to design new models with enhanced capabilities further
pushed down the margins as R&D expenditure was rising. This gave birth to a new
entity in the supply chain, the original design manufacturers. Unlike in the EMS
model, where OEMs develop and retain the handset intellectual property rights,
ODMs are independent contractors who develop prototype handsets and sell them
to established OEMs who in turn market them under their brand names. The
advantage of outsourcing to ODMs was that it allowed the OEM to reduce design
Table 5. OEMs entry/exit dates, number and concentration.

1140
First growth Second growth Shake-out Maturity

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010*
(continued)
Table 5. (Continued).

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010*
Business History
1141
(continued)
1142
Table 5. (Continued).

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010*
Notes: Grey bars represent the years the OEMs were operative in the market.
*Until May 2010.
**In the sample are considered only OEMs operating at the international level (are excluded very small manufacturers).
***Yearly average number of entries and exits in the ILC stage.
****Cumulative market share of the four largest OEMs.
Source: Our elaboration from Gartner Dataquest, http://www.gsmarena.com/makers and rms annual reports.
and R&D expenses. However, the growing importance of ODMs also quickly
became a threat to established OEMs. The partnership with OEMs educated ODMs,
turning some of them into real competitors. BenQ, a Taiwanese ODM, was the most
prominent example, selling handsets under its own brand (Table 6).
The constant search for improved handset capabilities increasingly pushed OEMs
to outsource the production of handset operating systems as well. By 2000 several
OEMs established partnerships with operating system (OS) makers such as Microsoft,
Symbian and Palm, whose advanced software enabled a rich user experience for new
data services, including secure web and email access and multimedia capabilities
(Table 6). The strong brand image of some OS makers, such as Microsoft, enhanced
the value of handsets, allowing higher selling prices and margins for OEMs. However,
this branding power was perceived by OEMs as a new potential threat.
Moreover, while in the 1990s network operators left handset design and
conguration to OEMs, at the beginning of the 2000s a growing number of network

operators, such as T-Mobile, Orange and O2, began having their own branded
handsets. They basically outsourced all the upstream supply chain activities,
controlling only the design and branding ones.
Therefore, starting from the end of the 1990s, with the exception only of some
South Korean OEMs, such as Samsung and LG (Hu & Hsu, 2008), the major
handset manufacturers began to strongly innovate their production processes, by
outsourcing part of their production, assembly and design activities to a wide
number of specialised third parties (chip and OS makers, EMS providers, ODMs).
This led to a greater dierentiation of the business models in the industry (Figure 4).
By focusing on fewer activities, OEMs were able to widen their product range
very quickly, continuing the positive trend started in the second half of the 1990s.
Table 6. Main EMS providers, ODMs, OS makers and their OEM clients over the 2000s.
EMS provider (country) OEM client

Flextronics (Singapore) Nokia, Sony-Ericsson, Siemens, Motorola
Solectron (US) Nokia
Elcoteq (Finland) Nokia, Sony-Ericsson
ODM (country) OEM client

Arima (Taiwan) Sony-Ericsson, Nec
BenQ (Taiwan) Motorola, Nokia
Compal (Taiwan) Motorola, Panasonic, Alcatel
Dbtel (Taiwan) Siemens
GVC (US) Sony-Ericsson
HTC (Taiwan) Orange, Siemens, Motorola
Microcell (Finland) Sony-Ericsson
Quanta (Taiwan) Panasonic, Siemens, Philips, Nec
OS makers (country) OEM client

Microsoft (US) Sony-Ericsson, Samsung, LG, Motorola, HTC
Symbian (UK)* Nokia, Sony-Ericsson, Samsung, LG
Palm (US) Samsung
Note: *Acquired by Nokia in 2008.

Source: Our elaboration from annual reports and newsletters of companies belonging to our sample.
Figure 4. OEMs business models in the 2000s: from vertically integrated to deconstructed
supply chains.
Note: *We dene an activity as outsourced if it is externalised to third parties even only for a
small amount (e.g. the production of a single type of component).
Source: Our elaboration from annual reports and newsletters of companies belonging to our
sample. The sequence of macro-activities on which we have developed the analysis has been
adapted from the McKinsey business system framework (Carter, Chatterjee, Gogel, & Puri,
1980).
In fact we nd that the average number of new models introduced every year by
OEMs increased from 6 in 2001 to 27 in 2005. However, it is also interesting to note
that, while at the end of the 1990s all the OEMs were able to introduce into the
market almost the same number of product models every year, dierences in the size
of OEMs product portfolios strongly increased over time. As shown in Table 4, the
standard deviation of the number of new models introduced every year by OEMs
increased very quickly from 2000.
Second half of the 2000s: the maturity stage

Technological convergence
In the mid-2000s the number of worldwide mobile phone sales to end-users was
nearing 1 billion. The developed countries average per capita penetration was close
to 100% (Figure 3); leading countries like Italy, Taiwan, Hong Kong and Israel
achieved penetration rates of about 140%. Since saturation was reached, demand
was wholly for replacement. In this stage of industry maturity, in order to stimulate
the demand for replacement purchases, OEMs added to both low- and high-end
handsets many non-typical functionalities such as a digital camera, MP3 player,

Internet connection, radio, voice recorder, etc. (Table 2). This phenomenon has
commonly been called technological convergence (Bores, Saurina, & Torres, 2003;
Rosenberg, 1963), expressed as the merging of several dierent technologies into a
single device. Far from being considered simply as elements for product
dierentiation, as observed until the mid-2000s, these multi-tasking products have
now become the new dominant design.
By oering functionalities that are not related to basic voice communication
capabilities, OEMs are in eect entering markets that are populated by rms that
make products for dierent uses, such as digital cameras, MP3 players, voice recor-
ders, etc. For instance, the latest mobile phones oer features that are comparable to
medium-quality digital cameras and MP3 music players. However, the watch-making
companies around the world are also aected by the convergence in mobile phones,
due to the emergence of handsets as time-keeping devices. The increasing number of

applications allowing the mobile phone user to write, read, download and send
documents are even blurring the line between handsets and portable computers, and it
is for this reason that some PC makers are now diversifying into the mobile phone
segment. Apple, with its iPhone, a device combining voice, MP3 player and PDA
application, is one of the most prominent examples.
Therefore, the use of product innovation as an element of dierentiation we
observed in the initial stages of growth and shake-out, is a strategy followed also
in the stage of maturity, reinforcing our suspicions about the prediction (of a
decreasing rate of product innovation) of the classical productprocess life cycle. In
the maturity stage the focus of OEMs on product innovation is even stronger than in
the stage of shake-out. The impact of the technological convergence on mobile
phones has in fact given birth to a new generation of devices: the smartphone.
Smartphones are electronic handheld devices that integrate the functionality of a
mobile phone, personal digital assistant (PDA) and other information appliance. A
key feature of smartphones is their advanced operating system, providing a graphic
interface similar to that of a desktop computer and allowing additional applications
to be installed. Some rms, such as Research In Motion (RIM), Apple and HTC
have built up their competitive advantage focusing only on the production of this
high-price high-margin device, much more expensive than the other phones because
of their advanced technologies. Also the big 5 (Nokia, Samsung, Motorola, Sony-
Ericsson and LG) are signicantly increasing the percentage of these products in
their portfolio.
The big 5 and the power of the brand image revisited

As predicted by the ILC model, while a high level of OEMs concentration prevailed
in the early stages of the industry evolution due to the low number of competitors
(Klepper, 1997; Utterback & Suarez, 1993), over the second half of the 1990s, the
competition intensied and the level of concentration decreased because of
newcomers. Finally, over the 2000s, when the industry entered a stage of shake-
out and maturity, the level of concentration increased again (Table 5). In particular,
in the second half of the 2000s, the consolidated brand image of the big 5 (Nokia,
Samsung, Motorola, Sony-Ericsson and LG) has conferred to these players a
relevant competitive advantage with respect to their smaller rivals. On the one hand,
smaller European and Japanese OEMs oering a relatively narrow product range
and focusing on low-end functionalities, such as Alcatel, Philips, Nec, Panasonic and
Siemens, were not able to serve the various market segments, losing competitiveness
and greatly weakening their brand image (most of these players have been forced to
withdraw). On the other hand, despite the increasing competition from Asian low-
cost manufacturers, brand recognition still speaks louder in developed countries.
The importance of the brand as an element of competitive advantage is strictly
related to the usage context of the mobile phone. In fact in the last ve years mobile
phones have increasingly been seen as fashion accessories. Together with
technological convergence, aesthetic design and co-branding agreements seem to
be two emerging competitive strategies. We have found numerous partnerships
between OEMs and fashion houses (Table 7).
Given the style-conscious target, these phones tend to emphasise design over
functionality. This competes with the interest of network operators, which prefer
consumers to be using advanced phones allowing access to a broader range of

network services (e.g. the WAP, the Internet). However, fashion brands will
increasingly become important as phones become less distinct in terms of features.
Most consumers now accept a camera or web access as given for new mobiles.
Within a few years this will be the same for advanced features that are currently seen
as revolutionary.
If on the one hand the high level of rm concentration in the stage of industry
maturity, favoured in part by the growing brand power of the biggest OEMs, is
consistent with the predictions of the ILC model, on the other hand we observed that
the technological convergence has favoured the entry of brands from other
industries. This in turn has increased the number of OEMs in the market, and
also the turnover of rms (Table 5). For instance, PC manufacturers such as Apple,
HP, Acer and Dell, as also software makers such as Microsoft, have recently
introduced their own branded handsets. Although most of the brands coming from
other industries have lower market share in the mobile phone industry than the big
5, they certainly represent a relevant threat due to their strong brand recognition
and customer retention ability. This recent trend in the mobile phone industry
(growing number of OEMs and growing turnover in an increasingly concentrated
Table 7. OEMs co-branding products with fashion houses.
OEM Fashion house Co-branded model Year of introduction

Nokia Cath Kidston Cath Kidston Nokia 6111/6230i 2006
Motorola D&G Motorola D&G RAZR V3i 2006
Aston Martin Motorola V600 Aston Martin 2006
LG Roberto Cavalli LG U880 Roberto Cavalli 2005
Prada KE850 Prada 2007
Samsung Armani P520 Armani 2007
Adidas F110 Adidas 2008
Ted Baker Samsung Ted Baker 2008
Siemens Escada Siemens SL55/SL65 Escada 2005/2007
Alcatel Mandarina Duck Alcatel Mandarina Duck 2007
Sony-Ericsson D&G D&G Jalou 2009
Source: Our elaboration from annual reports, websites and newsletters of companies belonging to our
sample, and special interest web pages for mobile telephony.
industry) is a further element that calls the general validity of the standard ILC
models into question.
Concluding discussion
Earlier in this paper we formulated two main research questions. First we aimed at
analysing the main factors that have exercised inuence on OEMs product strategy
development over the mobile phone industry life cycle. Second, we aimed at
investigating if these factors can be explained by the standard industry life cycle
framework (Abernathy & Utterback, 1978; Klepper, 1997; Utterback & Suarez,
1993).
With regard to the rst research question, we observed that the rationales for
mobile phone manufacturers product strategy have changed over the industry life
cycle in response to a number of factors, such as:
. the intense global competition and the inux of low-cost manufacturers,

which, together with the economic downturn at the beginning of the 2000s,
triggered a price war putting pressure on manufacturers margins and
protability;
. the increasingly penetrated mass market, which has forced OEMs to introduce
several product innovations (Table 2) in order to stimulate the demand for
replacement purchases. This inux of new product innovations has constantly
reshaped the product scope over time;
. the increasing number of consumer segments and the increasing demand for
converging products, which have forced OEMs to widen their product
portfolio and innovate their processes. In order to cope with increasing
manufacturing and R&D expenditure, most of the OEMs have then
outsourced various activities to third parties along the supply chain (Table 3).
This has given birth to various business models that coexist in the industry (e.g.
integrated vs. semi-integrated);
. the users increase in product knowledge, which has progressively shifted from
more technical product attributes to features more related to the socially
shaped usage context (experience and status-related dimensions). This is the
rationale for the growing role of the manufacturers brand image in inuencing
the consumers purchasing process. The strong role of brand image has
encouraged players from other industries (e.g. Apple, HP, Dell, Microsoft) to
enter the market with the aim of exploiting the demand for converging
products.
With regard to the second research question, we observed that factors explaining
the changing rationale for product strategy formation in the mobile phone industry
are only partially explained by the standard industry life cycle framework
(Abernathy & Utterback, 1978). Until the end of the growth stage of the industrys
evolution the main industry dynamics we observed t with the classical product
process life cycle model: product and process innovation were both a key
determinant of a successful product strategy. However, the model is not fully
suitable to give reason for the constantly high rate of product innovations we
observed in the following stages. By analysing the specic context of the mobile
phone industry we have shown that in the period of shake-out, when the demand is
increasingly penetrated, product innovations continue to play a key role in the

OEMs product strategy. The product innovation is even stronger in the stage of
maturity, driven by the impact of technological convergence: we observed the
introduction of several revolutionary product technologies, like those incorporated
in the smartphone devices. For example, the introduction of colour display and
camera phones at the beginning of the 2000s, despite the highly penetrated market,
helped the demand for mobile phones to continue to grow, pulled by replacement
purchases. The inux of new product innovations has continued in the second half of
the 2000s with the introduction of advanced technologies making handsets smarter:
e.g. OEMs have equipped some of their models with advanced operating systems,
allowing consumers to use the mobile phone as a personal computer.
Findings from the worldwide mobile phone industry invite future research to
explore the opportunity to ll the interpretative gaps of the classical ILC model
borrowing from other theoretical frameworks. Especially when disruptive events

occur in the industrys evolution, like those driven by technological convergence, the
assumptions of the standard ILC model about the changes of customers product
knowledge and rms technological competencies can hardly hold without further
renements. For example, the integration with some elements of the organisational
ecology framework (Hannan & Freeman, 1989) could help to analyse the rms
survival rate over the various stages of the industry evolution. Also some of the
perspectives oered by the co-opetition model introduced by Brandenburger and
Nalebu (1997) could help an understanding of the complex interdependence
dynamics between dierent players in the mobile phone ecosystem, as emerged, for
example, observing the changing patterns of interaction between OEMs, network
operators and OEMs suppliers (Table 3). A deeper theoretical analysis goes beyond
the scope of this article, but we strongly recommend further eorts along this line of
theoretical integration in order to ameliorate comprehension of the long-run
industry evolution.
Some limitations to the current study suggest opportunities for future research.
First, we analyse the manufacturers product strategy at a global level, without
distinguishing among the various geographical markets in which manufacturers
operate. In fact, each country might be characterised by dierent industry dynamics
and in turn also by dierent life cycles. Therefore, future research should replicate
the analysis at the country level. Second, our analysis being focused on the mobile
phone industry, we do not control for industry-specic variables, and in turn the
patterns we observed in product innovation cannot be easily generalised in other
industries. Further research could then analyse the productprocess life cycle in
other technology-based industries, in order to understand in which cases the pattern
we observe is conrmed.
Notes on contributors
Claudio Giachetti is Research Fellow at the Department of Business Economics, Universita di
Modena e Reggio Emilia. He received a PhD in Business Economics at the Ca Foscari
University of Venice (2010). He was visiting research fellow at the University of Zaragoza
(2010), visiting PhD student at Cass Business School in London (2008) and received a master
degree in International Management from the Universita di Modena e Reggio Emilia (2005).
He has worked as a consultant for various multinational companies operating in technology-
based industries, such as SAP Italia and CRIF Group. He is the author of various papers on
strategy and technology innovation. His research interests include product innovation and
industrial policy.
Gianluca Marchi gained a degree in Business Economics at the Universita di Modena e

Reggio Emilia and a PhD in Business Studies at the Ca Foscari University of Venice (1995).
He is now Associate Professor of Strategic Management at the Department of Business
Economics, Universita di Modena e Reggio Emilia (Italy). His research interests centre on
SMEs internationalisation processes, knowledge transfer management and product
innovation. He is the author of various conceptual and empirical papers on these topics.
His studies are also focused on the mechanical industry, with particular reference to the
industrial cluster context.
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On: 23 November 2014, At: 18:19

Evolution of firms' product strategy

To link to this article: http://dx.doi.org/10.1080/00076791.2010.523464

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Evolution of rms product strategy over the life cycle of

Department of Business Economics, Universita di Modena e Reggio Emilia, Modena, Italy

*Corresponding author. Email: gianluca.marchi@unimore.it

ISSN 0007-6791 print/ISSN 1743-7938 online

product innovations (dened as changes in the characteristics of a handset, e.g.

whole (analysed) time period we observed a persistence of competitive changes

Product strategy and the industry life cycle

stylised life cycle model has become an important framework in management

. eleven telephone semi-structured interviews with product and marketing

Secondary sources include:

newspapers and business publications.

Mobile phone industry denition

Figure 1. The mobile phone ecosystem.

electronic components and devices on behalf of their OEMs (electronic manufactur-

Manufacturers product strategy evolution over the industry life cycle

mobile phone industry, Motorola was able to gain a substantial rst-mover

First half of the 1990s: the rst growth

Second half of the 1990s: the second growth

Product innovation calls for process innovation

Table 1. Main product technologies introduced by OEMs.

Product technology Firms introducing the technology* Year of introduction

MP3 Samsung and Siemens 2000

Segmentation as a basis for dierentiation

Table 2. Key factors in the evolution of OEMs product innovation.

Source: Our elaboration.

Table 3. Key factors in the evolution of OEMs process innovation.

chain business integrated integrated

Source: Our elaboration.

OEMs as a basis for dierentiation. Equipment manufacturers were struggling to

First half of the 2000s: the shake-out

Figure 3. Mobile phone subscribers per 100 habitants (19932008).

The de-verticalisation of OEMs supply chain as a way to innovate processes

Table 5. OEMs entry/exit dates, number and concentration.

First growth Second growth Shake-out Maturity

First growth Second growth Shake-out Maturity

First growth Second growth Shake-out Maturity

conguration to OEMs, at the beginning of the 2000s a growing number of network

EMS provider (country) OEM client

ODM (country) OEM client

OS makers (country) OEM client

Note: *Acquired by Nokia in 2008.

Second half of the 2000s: the maturity stage

handsets many non-typical functionalities such as a digital camera, MP3 player,

due to the emergence of handsets as time-keeping devices. The increasing number of

The big 5 and the power of the brand image revisited

consumers to be using advanced phones allowing access to a broader range of

Table 7. OEMs co-branding products with fashion houses.

OEM Fashion house Co-branded model Year of introduction

cycle in response to a number of factors, such as:

. the intense global competition and the inux of low-cost manufacturers,

increasingly penetrated, product innovations continue to play a key role in the

borrowing from other theoretical frameworks. Especially when disruptive events

Gianluca Marchi gained a degree in Business Economics at the Universita di Modena e

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