The Limits of Industry-Centered Strategic Thinking in an Era of Convergence

A decade ago, when purchasing a new cellphone,informed customers would likely choose between Nokia, Ericsson, Motorola, or perhaps even Siemens. Today, youngsters, hipsters, techies and executives alike opt for Apple, Samsung and LG. What happened?

Following the burst of the dot-com bubble in 2001, technology companies quickly regained foothold. But reclaiming lost market share and outwitting industry competitors was no guarantee for long-term success. Some lost the battle already during the bubble – online fashion retailer Boo.com lasted two years before going bust in 2000. Some held out a little longer. Once a leading manufacturer of computers, Compaq never regained their pre-bubble profits and was eventually acquired by HP in 2002. Some had great foresight, but still failed (and here is where it gets interesting).

Consider Nokia. Following the burst bubble Nokia was the largest cellphone manufacturer in the world. It was rich and successful. Yet a cautious company, not entirely swept away by floods of hubris. Knowing that change was coming Jorma Ollila, then CEO of Nokia, laid out the challenge in a 2001 Business Week article. Mr. Ollila stressed the need for the emerging ‘mobile Internet’ industry to remain “under control of the mobile industry, and not the computer makers” (Baker, 2001).

New competitors were of a different breed

Less than a decade later Mr. Ollila’s successor Olli-Pekka Kallasvuo found himself in a somewhat peculiar situation: Nokia was still the market leader in the number of sold units, but Mr. Kallasvuo had to deal with a completely new set of competitors than Mr. Ollila had to. And more importantly, these new competitors were of a different breed. All of the sudden, companies that did not pride themselves with a long and glorious history in the mobile industry, such as Samsung and LG had replaced Motorola, Ericsson, and Siemens as top mobile makers(Gartner Data quest, 2000; 2010). Even more worrying, new revenue streams did not offset declining revenues from traditional product offerings. This called into question the sustainable competitive advantage of these companies as key underlying knowledge assets and technologies gradually become obsolete.

Nokia mobile phones: from hero to zero

The rest is a well-known history, particularly reflected in recent events. In 2011, Nokia announced a broad strategic partnership with Microsoft – a “computer maker”– with the objective to build a new global mobile ecosystem. The strategic agreement announced by the new Nokia CEO, Stephen Elop (formerly an Executive VP at Microsoft) would determine the end of Symbian (an operating system) development plans and lead Nokia to adopt Windows Phone as its principal smartphone strategy.

The partnership, conceived so that Nokia could help drive the future of Windows Phone, turned into the company’s exit from the mobile business. In September this year, Nokia’s mobile handset business was acquired by Microsoft for $ 7bn (consider that only five years ago Nokia had a market capitalization of $ 116bn).

An epic failure of strategy-making

Some consider these events an epic failure of strategy-making. Perhaps. What is clear is that Nokia is in ‘good’ company. Ericsson and Siemens abandoned their cell phone business long before Nokia. The turnaround of Research in Motion (RIM), the company behind BlackBerry, has not gone smoothly either. BlackBerry, once the most coveted gadget of the global political and business elite, was out-competed as its offering failed to adapt to new strategic realities. Despite a bold turnaround-attempt by the new CEO Thorsten Heins, RIM continues to struggle. Consider for example the recent announcement of nearly $ 1bn in losses in Q2 and expected lay offs of 40% of the workforce. Can we explain these patterns and devise some lessons? We believe so.

Industry convergence as a game-changing force

The industry convergence phenomenon provides a powerful explanation for the loss of incumbents’ leading positions (Hacklin 2010). Industry convergence can be defined as the ‘blurring’ of boundaries between industries, induced by “converging value propositions, technologies and markets” (Choi and Välikangas, 2001, p. 426). Industry convergence oftentimes presupposes underlying bases of technologies and knowledge to come to share increasingly similar characteristics (Lei, 2000), that is, allowing one technology from industry A to suddenly be applied in industry B.

Examples of convergence can be observed between various industry settings, such as information and communication technologies (“smartphones”), biotech and pharmaceutical industry (“biopharmaceuticals”), nutrition and pharmaceutical industry (“nutraceuticals”) or energy and information technology (“smart grids”) (PwC, 2012; Deloitte, 2006; Hisey and Rhodes, 2008; Bröring, 2010). Convergence erodes previously distinct boundaries between knowledge bases and their applications, and introduces new mutual dependencies between organizations, e.g. through change in competition, collaboration or buyer-supplier relationships (Hacklin, Marxt and Fahrni, 2009).

Firms must manage their internal portfolio of competencies to be able to meet the demands of a converging world

Whenever industries converge, a new, unprecedented direction of innovation and entrepreneurship gets sparked off, creating opportunities for some, but threats for others (Hacklin, Battistini and von Krogh, 2013). As the phenomenon oftentimes redefines the rules of the game within an entire industry, the implications of industry convergence are far reaching for strategy-making. Firms must manage their internal portfolio of competencies to be able to meet the demands of a converging world (Lei, 2000).

For example, established players in the pharmaceutical business such as Pfizer or Novartis need to increasingly look into the nutrition business and make sure they are on top of trends developing beyond their traditional comfort zone. This can be observed in the way big pharma currently is recruiting talent, for example increasingly hiring biotech engineers and partnering with innovative early-stage biotech startups.

A new paradigm for innovation beyond industry boundaries

Firms need to be able to anticipate and understand the new industry architecture emerging out of convergence, adapting their strategies accordingly. For example, traditional camera manufactures, such as Nikon or Canon, surely understand that new and true competition is coming from smartphone manufacturers such as Apple or Samsung—and not necessarily from other traditional camera manufacturers.

Many firms struggle to recognize the dynamics of convergence

To underscore: “[as] industries converge and seemingly unrelated businesses suddenly become rivals, managers must understand the new challenges and the long-term implications (Hacklin, Battistini and von Krogh, 2013)” Yet, as in the case of Nokia, many firms struggle to recognize the dynamics of convergence and the associated challenges and opportunities. While timing is critical, the disruption resulting from convergence gives rise to a highly complex, fluid and uncertain environment, where strategic choices are extraordinarily hard to make.

Convergence in the mobile technology industry resulted in a fragmentation of well-established value chains and redefinition of market structure. In this new environment, a number of new players entered the market as industry outsiders. Outsiders that either entered the market exploiting the commercial application of advanced technologies or challenged the mobile industry by shifting the focus of attention to software and content, like in the case of Apple.They defined a new paradigm, defined by a new mobile user experience dependent upon the quality of mobile interactions, applications and services.

Lessons learned for strategic thinking

Based on the insights on how industry convergence changed the aforementioned ICT industries, it is important to draw lessons learned for similar settings, where game-changing effects of industry convergence lie ahead (e.g., the convergence between pharmaceuticals/life sciences and nutrition industry, as seen on the innovations around “functional foods”).

When today’s strangers can become tomorrow’s competitors, we need to revise our strategic thinking

The Nokia case illustrates the limits of our conventional strategy and planning frameworks. Whereas the traditional business school strategy toolkit is based on the assumption of well-defined industry boundaries (e.g., Porter’s five forces, value chain analysis, etc.), such a condition is far from given in an age of converging industries. When today’s strangers can become tomorrow’s competitors, we need to revise our strategic thinking. And ask ourselves, if technology does not care about industry boundaries, why should managers, board members, consultants and analysts?

By Fredrik Hacklin, Boris Battistini and Martin W. Wallin

About the Author

Fredrik Hacklin is heading the Corporate Innovation Lab initiative at the Department of Management, Technology and Economics at ETH Zurich. Previously, he was an associate with Strategy& and has had visiting positions at Stanford University and Keio University.
Fredrik holds a Ph.D. in management from ETH Zurich, and an M.Sc. in computer science from KTH Royal Institute of Technology, Stockholm.

Boris Battistini is a senior research fellow at the Department of Management, Technology, and Economics at ETH Zurich. He was a project leader of the Corporate Venturing Research Initiative with Bain & Company and visiting fellow at Cass Business School.
He is a graduate of King’s College London and holds an M.Sc. and an M.Res. in Management from the University of London and a Ph.D. from ETH Zurich.

Martin W. Wallin (Ph.D., Chalmers University of Technology, Sweden) is an associate professor at the Department of Management, Technology, and Economics at ETH Zurich, Switzerland.
His research focuses on the organizational and motivational implications of open innovation and his work has appeared in MIS Quarterly, Research Policy, Technovation, R&D Management, and Organizational Dynamics.


REFERNCES:

 

Baker, S. 2001. Halting Microsoft’s march in Europe? Business Week, December 21.

Bröring, S. 2010. Developing innovation strategies for convergence: Is ‘open innovation’ imperative? International Journal of Technology Management, 49(1-3), pp.272-294.

Choi, D.,Välikangas, L. 2001. Patterns of strategy innovation. European Management Journal, 19(4), pp.424-429.

Cockburn, S., Gmelin, H. and Peterson, M., 2010. Convergence reloaded: How telecom operators can best capture consumer opportunities, Strategy&, www.strategyand.pwc.com.

Deloitte Touche Tohmatsu’s Global Technology Media and Telecommunications Industry Group. 2006.Convergence conversations, Deloitte, www.deloitte.com

Hacklin, F. 2010. Management of convergence in innovation: Strategies and capabilities for value creation beyond blurring industry boundaries. He idelberg, Germany: Physica/Springer.

Hacklin, F., Marxt, C., and Fahrni, F. 2009. Coevolutionary cycles of convergence: An extrapolation from the ICT industry. Technological Forecasting and Social Change, 76(6), pp.723-736.

Hacklin, F., Battistini, B., and von Krogh, G. 2013. Strategic choices in converging industries. MIT Sloan Management Review, 55(1), pp.65-73.

Hisey, R.T., Rhodes, J. 2008.Convergence in the life sciences industry: Can partnering make a significant impact?” Pharmaceutical Processing, January 16.

Lei, D. T. 2000. Industry evolution and competence development: the imperatives of technological convergence. International Journal of Technology Management, 19 (7-8), pp.699-738.

PwC. 2012. Five management principles from companies modernizing our vehicles, buildings and electric grids. PwC, www.pwc.com

Photo: Mobility and modern telecommunication concept from shutterstock.com

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