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Un i v e r si t y o f N o t t i n g h a m
Are Fi rs t -Mov er Advan t ages Rea l l y Sus t a inab le?
A Case St ud y o f Fore ign Mob i le Phone
Manu fac tu r e rs i n Ch ina
Yu-Fang Yang
MSc I n t e rna t i ona l Bus iness
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Are Fi rs t -Mover Advant ages Rea l l y
Susta inab le?
A Case St ud y o f For e ign Mobi l e Pho ne
Manuf act u r ers in Ch in a
By
Yu -Fan g Yang
2 0 0 8
A Dissertation presented in part consideration for thedegree of MSc International Business
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A c k n o w l e d g e me n t
Firstly, I would like to thank to my supervisor, Dr. Chengqi Wang, for
his guidance and suggestion in the process of writing my dissertation.
In addition, I wish to appreciate the support of my parents, my
brother and sister, and friends in Taiwan. Finally, I will offer my
heartfelt thanks to my friends in the University of Nottingham for their
encouragement and company during this period.
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Abs t rac t
The answer to whether the first-mover advantage is a source of
sustainable competitive advantage is still debatable. Empirical
studies are widely made in many industries. However, many of them
are made in the United States. In this dissertation, the first-mover
advantages and the resource-based view of a firm are applied jointly
to Chinas mobile phone industry to examine whether the first-mover
advantages are really sustainable.
According the results, it is found that the sustainability of first-mover
advantages depend on many factors. It depends on the resources
pre-empted by the first mover at the initial stage and its ability to
accumulate and develop new resources. In addition, the resources
possessed by the followers are also critical. The resource portfolio of
a firm may change over time, especially when the market is in the
transitional period or becomes more competitive. Pioneers enjoy the
benefits of early entry before the entrance of other rivals. However,
the first-mover advantages may perish over time and late entrants
may surpass the pioneers if they can not develop new resource
portfolio in accordance with the market change.
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Con ten ts
Page
Acknowledgement
Abstract
Contents of Figures and Tables
Chapter 1: Introduction 1
1.1 Background 1
1.2 Aims and Objectives 2
1.3 Research Structure 6
Chapter 2: Literature Review 8
2.1 External Analysis 9
2.1.1 PESTEL Analysis 9
2.1.2 Five Forces Analysis 10
2.2 Internal Analysis 16
2.2.1 Resource-Based View Analysis 17
2.2.2 Resource Portfolio Change 21
2.2.3 First-Mover Advantages 22
2.2.4 The Synergy of FMA and RBV 25
Chapter 3: Methodology 27
3.1 Introduction 27
3.1.1 Quantitative and Qualitative Methods 27
3.1.2 Why Qualitative Method 28
3.2 Research Design 30
3.2.1 Case Study 30
3.2.2 Selection of Case Companies 32
3.3 Sources of Data 35
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3.3.1 Data Collection 35
3.3.2 Limitations 38
Chapter 4: Chinas Mobile Phone Industry 40
4.1 The Macro Environment of China 40
4.2 Chinas Mobile Phone Industry 42
4.2.1 Overall Situation 42
4.2.2 Competition between Local and Foreign Firms 44
4.3 Triggers for Chinas Mobile Phone Industry 46
4.3.1 Economic Development 46
4.3.2 Government Policies 48
4.3.3 Other Factors 51
4.4 Characteristics of Chinas Mobile Phone Industry 52
4.4.1 Highly Technology Concentrated 52
4.4.2 Intensive Competition 53
4.5 Five Forces Analysis of Chinas Mobile Phone Industry 54
4.5.1 Threat of Entry 54
4.5.2 Threat of Rivalry 56
4.5.3 Threat of Substitutes 57
4.5.4 Threat of Supplier 57
4.5.5 Threat of Buyers 58
Chapter 5: Case Studies: Motorola and Samsung 60
5.1 Company Background 60
5.1.1 Motorola, Inc 60
5.1.2 Samsung Electronics 61
5.2 Firm Resources 63
5.2.1 Technology 63
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5.2.2 Brand Reputation 66
5.3 First-Mover: Motorola 69
5.3.1 Discover the Opportunity 69
5.3.2 100 Percent Control in the Chinese Operations 70
5.3.3 Long-term Investment 70
5.3.4 Maintain Guanxi 71
5.4 Follower: Samsung 72
5.4.1 A Business Group 72
5.4.2 Project Execution Ability 73
5.4.3 Vertical Integration 75
5.5 Discussion 77
Chapter 6: Conclusion 83
6.1 Findings and Implications 83
6.2 Contribution of this Study 85
6.3 Limitations and Future Research Direction 86
References 89
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Cont en t s o f Figur es and Tab les
Page
Table 1 Chinas Mobile Phone Market Occupation by Brand in 2005
35
Figure 1 Development of Mobile Phone Market in China,
1995-2006 43
Figure 2 The Proportion of Mobile Phone Subscriber in China,
2000-2007 44
Table 2 Chinas Economic Growth, 1978-2005 48
Table 3 Best Global Brands, 2003-2006 69
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1
Ch a p te r 1 : I n t r o d u c t i o n
1 .1 Backg r ound
As one of the worlds largest emerging markets, China has attracted a
large number of foreign direct investments (FDI). Many multinational
companies increasingly regard China as a strategic market rather
than a production base. Chinas mobile phone industry has flourished
in recent years due to remarkable economic performance and great
social changes. Many multinational mobile phone manufacturers are
drawn in by the very large amount of customers and potential for
economic growth. The flourishing industry has been cultivated by
continuous economic development and promotion by the Chinese
government. After WTO admission in 1999, China took a more open
attitude towards foreign investment. In addition, the deregulation and
reformation of the telecommunications industry facilitated the
development and competition of the mobile phone market as well as
the diffusion of mobile phones.
Motorola entered China in 1987 and dominated the local market in the
early 1990s. Nokia and Ericsson immediately followed and enjoyed
the benefits of Chinas flourishing mobile phone market. Japanese and
Korean companies started participating in this market in the late
1990s (Low, 2005) in spite of uncertainty surrounding government
policies.
As one of the largest mobile phone manufacturing bases in the world,
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China produced 550 million mobile phones in 2007, accounting for
more than half of the worlds production volumes of handsets. Nokia,
Samsung Electronics, Motorola, Sony Ericsson and LG electronics
contribute to about 70 percent of total production in China (Shen,
2008). Many of them have built local manufacturing facilities and R&D
centres in China in order to respond to domestic needs.
The industry structure is undergoing a transition and the level of
competition in this industry is getting higher. Companies have to vary
their strategies with the changing environment. Accordingly, firm
resources are useful as a bargaining counter to compete and survive
in the highly competitive industry. This is in accordance with the
resource-based view which suggests that firm resources represent a
mechanism for competitive advantage (Veliyath and Fitzgerald,
2000).
1 .2 A im s and Ob jec t i ves
Firms competing in an industry have competitive strategies. These
strategies are developed through a planning process in respect to the
environment in which they operate, corresponding to their core
competencies. That is to say, firms apply their specific abilities to
exploit the potential opportunities in the dynamic business
environment. Therefore, it is essential for a firm to figure out its
strengths and explore the opportunities in a market. The core
competence of a firm may help it conceive and implement competitive
strategies. There are two influential frameworks in the literature on
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strategic management, Porters five-forces model and the
resource-based view of the firm. The two frameworks examine the
same issue from different perspectives. Porters framework suggests
that a firms strategy will be affected by the industry structure it works
in, whereas Barneys resource-based view of a firm advises that their
internal resources and capabilities are sources of competitive
advantage. The resource-based view shifts emphasis from external
factors toward internal firm resources in the strategic management
literature. The two theories can complement each other and both of
them are utilised in this dissertation.
As one of the emerging countries in the mobile phone industry,
Chinas mobile phone industry has developed for more than twenty
years. Motorola entered China as the first-mover in this industry,
with a long history of telecommunications market domination.
However, Samsung, the latecomer, surpassed Motorola and seized
its leading position in a short time. Compared with Samsung,
Motorola should have had an advantageous position due to its earlier
entry into this market. However, the late entrant, Samsung, in an
inferior position due to the lack of local resources and knowledge,
struggled against the leading competitors at the time of its entry.
Therefore, they might have needed to adopt different strategies in
terms of their own firm resources to confront the powerful
incumbents.
It can be seen that the sequence of entering a new market may
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influence the strategies implemented by multinational companies.
The first-mover may possess the local resources, such as the
distribution system, and may have built its brand name firmly in the
minds of customers at an early stage. All of these create entry
barriers to those who follow. The timing for a newcomer is important.
It is easier to succeed when the market is in a transition period, such
as when a country is changing its policies and when there is
development of new technology in an industry or a shift in consumer
behaviour. The economy of China is growing rapidly and it is in the
process of transforming its traditional economic structure, thus, it
offers many opportunities for multinational companies.
Research q ues t ion s
The purpose of this research is to analyse and discuss whether the
sequence of entering a new market will influence the strategies
adopted by those multinational companies with different firmresources. In addition, it is also attempts to illustrate how a latecomer
to an industry can overcome latecomer disadvantages and
successfully come to stand in a leading position by means of its firm
resources. Conversely, why and how a first-mover suffers at the
hands of the latecomers, even though they are in an advantageous
position, will also be examined. Finally, the dissertation also tries to
answer whether the first-mover advantage is sustainable in an
industry. All of these research questions focus on the distinctive firm
resources held by different companies and are explored and discussed
in terms of the resource-based view, with an emphasis on the
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evolvement of firm resources and capabilities.
The resource-based view in strategic management has been
developed theoretically and practically tested (Barney et al., 2001).
The theory has diffused into many fields of study, including human
resources (Wright et al., 2001), marketing (Srivastava et al., 2001),
international business (Peng, 2001), and first-mover advantages
(Lieberman and Montgomery, 1998). The resource-based view is
considered as one of the top three most profound theories in exploring
emerging economies (Hoskisson et al., 2000). Furthermore, it is also
appropriate when probing into the complexity of competition in
emerging economies (Peng, 2002). Therefore, it is proper to apply the
RBV to the study of the mobile phone industry in China.
The answer to whether the first-mover advantage is a source of
sustainable competitive advantage is still debatable (Li et al., 2003).
Empirical studies relating to the first-mover advantages consist of
many industries and markets, such as financial products (Tufano,
1989), the pharmaceutical industry, and the frozen food industry
(Sutton, 1991). However, most of these studies have been made in
the United States (Lieberman and Montgomery, 1998). Therefore, it
might be interesting to study the first-mover advantages in other
countries. On the other hand, Lieberman and Montgomery (1998)
suggest that it will be of great help for further study if researchers can
integrate research on first-mover advantages with the RBV theory. For
these reasons, the resource-based view of the firm and the
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first-mover advantages will be jointly applied to Chinas mobile phone
industry in this dissertation.
1.3 Research St ru c tu r e
The dissertation involves six chapters. The first chapter describes the
background, clearly indicates the research questions and outlines the
research structure. In the second chapter, the relevant literature on
strategic management is reviewed. The literature review is organised
into three parts. The broadest layer is the PESTEL analysis used to
examine the macro environment. The next layer is Porters five forces
model used to analyse the characteristics and threats within an
industry. The last part relates to the organisational level, the
resource-based view, and it suggests that firm resources determine
firm strategies and are the key to achieving a competitive advantage.
In addition, the literature on first-mover advantages is discussed and
the link between first-mover advantages and the resource-based view
is highlighted. The third chapter describes the methodology of this
dissertation. Moreover, for greater understanding, a double-case
study is used.
The fourth chapter explores Chinas mobile phone industry, giving a
portrayal of Chinas macro environment and then identifying the
sources of threats in Chinas mobile phone industry. PESTEL is applied
to evaluate the macro environment in China, whereas Porters five
forces model is utilised to assess the threats in Chinas mobile phone
industry and to check which force is the most influential to the
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industry. The interplay between the main players in this market
determines the industry structure, which then significantly influences
the main player again in return. Moreover, the drivers of the
development of the mobile phone industry and the characteristics of it
are also considered.
The fifth chapter contains a case study. Two leading global mobile
phone manufacturers, Motorola and Samsung, are selected to stand
for the major manufacturers in this market. After briefly introducing
their backgrounds, their resources are compared and their strategies
are reviewed and discussed in light of this. The companies are
examined in depth in terms of their R&D capability, brand name, and
other specific firm resources. This research examines how these firm
resources and capabilities evolve over time and how the two
companies exploit them in response to the environmental changes,
with an emphasis on the linkage between entry order and the
accumulation of firm resources. The first-mover concept is examined
using a resource-based perspective. Finally, the dissertation
concludes with a discussion and by outlining the limitations and
possible future studies.
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Chap t e r 2 : Li te ra t u r e Rev iew
A strategy is a plan for the actions taken to attain one or more
organisational goals (Morris, 2005:53). The task of strategy
formation is one of achieving a match between the organisations
internal skills, capabilities, and resources on the one hand and all of
the relevant external considerations on the other hand (Thompson
and Strickland, 1986:74, cited by Morris, 2005). In other words, in
the strategic management process, both external analysis and
internal analysis are needed to be taken into consideration if a firm is
eager to formulate high performance-generating strategies. The
external analysis includes the realisation of the macro environment in
which a firm operates and the attributes of the industry that the firm
belongs to. In this way, it is possible for a firm to discover the potential
threats and opportunities in the environment. On the other hand,
internal analysis helps to determine the strengths and weaknesses of
a firm and then helps the firm to conceive and implement strategies
that can exploit opportunities or neutralise the threats that may exist.
Firms have their own unique strengths and weaknesses in coping with
the external environment and industry structure. However, these are
not fixed and change gradually over time. A firm should realise the
impact of their environment on the level of performance. Therefore,
understanding the external conditions and the industry structure is a
good starting point for a strategic analysis. Environmental models
help identify the possible resources of a firm, whereas resource-based
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models advise on the further attributes needed to be held by those
resources that allow them create sustained competitive advantages
(Barney, 1991). These two approaches view the same issue from
different perspectives and can complement each other to some
extent.
2.1 Ex t e rna l Ana lys is
Firms usually have to confront uncertain and complex external
environments. This turbulence and complexity may damage a firms
financial performance. In order to reduce the impact, a firm has to
also be able to correspond to the dynamic external environment. In
other words, it is of great important to realise the impact on industry
and firms resulting from the external environment. Therefore,
efficient analysis tools for the external environment are essential. The
external environment analysis includes the macro environment and
the industry environment (Johnson et al, 2006). PESTEL analysis is
useful in analysing the general environment in which firms operate,
whereas Porters five forces model is valuable in identifying the
sources of threats within an industry.
2.1 .1 PESTEL An aly sis
The broad environment consists of six environmental forces: political,
economic, social, technological, environmental and legal (Johnson et
al., 2006). PESTEL analysis is usually applied to analysis of the
general environment. These elements of the PESTEL framework work
dependently and may influence the others. As any one of them
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changes, the general environment will also change. There are some
drivers listed on the PESTEL checklist that can help firms to depict the
general environmental conditions. These drivers vary from country to
country, thus it very hard to identify them. If firms can recognise the
key drivers behind the changes, they can develop strategies in
accordance with the environment and are more likely to deal with the
change immediately. In addition, it is also useful for firms to forecast
the future trends, examine the impacts, and thus conceive
appropriate strategies, especially in uncertain environments (Johnson
et al., 2006). On the other hand, the PESTEL model can be associated
with the five forces model to forecast and shape the future structure
of an industry (Faulkner and Bowman, 1995).
2.1.2 F ive For ces Analy s is
The next layer in external environment analysis is industry. An
industry is defined as a group of firms producing similar goods or
services for the same market (Faulkner and Bowman, 1995:39).
Porter (1980:5) defines an industry as the group of firms producing
products that are close substitutes for each other. Porter (1980)
suggests that industry structure can strongly affect the competitive
rules in an industry and that the forces in an industry usually affect all
the firms in the industry, since these operate their business in the
same environment and for similar customers. The information
regarding the business environment and the competitors is
particularly important. Therefore, it is crucial for firms to analyse and
assess the industry before deciding to commit to it. There are many
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models developed to identify the environmental threats and
opportunities facing a particular firm. The most widely known and
used one is the five forces framework made by Michael Porter
(1980).
Environmental threats are the external factors, such as competitors,
people, or organisations, which are able to negatively affect the
performance of a firm (Barney, 2007). Since firms are looking for
competitive advantages, it is essential for them to identify the
environmental threats that may reduce their performance. Threats
can increase the degree of competitiveness of an industry, increase
the costs and decrease the revenues, and thus, reduce the level of a
firms performance. In the five forces model, Porter identifies five of
the most general threats confronted by firms in their operational
environment. According to Porter (1980), the attractiveness and
profitability of an industry are strongly related to the structure of the
industry, and, five competitive forces operating in the industry mainly
determine the industry structure. Therefore, the critical task of a firm
is to find the best position in this industry from where it can protect
itself from the threats and have command of the industrial situation
(Porter, 1979).
On the other hand, the model points out that an attractive industry,
from the perspective of the incumbent firms, is one where the five
forces are low, whereas an unattractive industry is one where the
power of the five forces is high. The five common environmental
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threats in the five forces model are the threat of entry, rivalry,
substitutes, suppliers, and the threat of buyers. The five specific
attributes can determine the level of industry competition and
profitability together. Suppliers, customers, substitutes, and potential
entrants can be regarded as competitors from a broader perspective.
There are various sources of the five forces and they will be discusses
in turn. It should be noted that if the industry condition changes, the
threat of entry will change as well (Porter, 1979).
Th e t h r e at o f e n t r y
New entrants to an industry are attracted by profitability and increase
the competition in an industry, and may reduce the market share and
decrease the profitability of the incumbent firms. The threat of entry
depends on the cost of entry and this depends on the barriers to entry.
Higher barriers of entry can increase the cost of entry and deter
potential competitors from entering the market. There are five main
sources of barriers to entry (Porter, 1979, 1980):
1. Economies of scale: Economies of scale can act as a barrier to entry
when the optimal size of entry to this market stands for a large
percentage of market supply. Therefore, the market is easily
exceeded by the supply and new entrants may inevitably accept a cost
disadvantage because they do not produce at the optimal level of
production. Therefore, this will discourage new entrants from
competing with incumbent firms.
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2. Product differentiation: Brand identification possessed by
incumbent companies can deter entry because it is costly for potential
entrants to overcome customer loyalty. On the other hand, incumbent
firms can create brand recognition by advertising or superior
customer service to differentiate themselves with new entrants.
3. Capital requirement: The need for large amounts of capital
investment in an industry for it to compete produces a barrier to entry,
especially when the expenses are unrecoverable. Companies who are
unable to obtain enough financial resources may give up on entering
the market.
4. Cost advantages independent of size: The incumbent firms may
have a wide range of cost advantages, irrelevant to economies of
scale or their size, compared with new rivals who are at cost
disadvantages. Cost advantages can create a barrier to entry and
incumbent companies can generate these advantages from
proprietary technology, specific know-how, access to the best raw
materials or locations, and the experience of a learning curve.
5. Government policy: Governments also play an important role in
creating entry barriers. They can set up policies, regulations or
standards to directly or indirectly control the amount of firms
operating in an industry.
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The th r ea t o f r i va l r y
Not only new entrants but also existing competitors can influence the
performance of a firm in an industry. The intensity of rivalry among
existing competitors is another threat faced. If the competition in an
industry is high, the attractiveness and profitability of it are more
likely to be low.
When the number of competing firms is large and the sizes of these
firms are nearly the same, it is more likely to generate a high level of
rivalry. In addition, slow industrial growth also results in a high level of
rivalry. The industry that ceases growing makes firms compete for
their market share (Porter, 1980). A firm willing to enlarge its market
share must do so at the expense of other competitors market shares.
Furthermore, if the products in the market have no differentiation to
buyers, it will lead to intense price competition because customers
can easily find other alternatives.
The th r ea t o f subs t i t u t es
Firms compete with others not only in their industry but also in other
industries producing substitute products that can meet roughly the
same customer needs. The substitutes may affect buyers willingness
to pay (Brandenburger, 2002). They can place a ceiling on the prices
firms in an industry can charge and thus limit the potential profits
(Porter, 1980). Thus, the substitutes can also threaten a firms
financial performance.
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The th rea t o f supp l ie rs
Suppliers provide all kinds of raw materials. They can threaten the
profitability of a firm by increasing the prices or decreasing the quality
of products supplied by them. The greater the bargaining power of
suppliers, the greater the threat to a firm. Suppliers can be very
powerful in some conditions. The threat of supplier is great when a
few firms mainly control their industry or the firm is not the major
customer of the supplier. Moreover, suppliers can be relatively more
powerful when the products or services provided by them are
differentiated or exclusive. In addition, if there are no substitutes
competing with the suppliers, they can take advantage of their unique
position and squeeze more profits from the purchasers. Finally,
suppliers may threaten the firms they supply when they have the
ability to integrate forward. By doing this, they become both suppliers
and rivals and enter the firms industry to compete with them.
The th r ea t o f buye rs
Buyers purchase the products or services from firms. Buyers can
reduce a firms revenue by cutting prices or asking for higher quality
or greater services while they are in a relatively stronger position
compared with the producer. Buyers can be very powerful in some
conditions: Firstly, if the number of buyers is small or the purchases
are concentrated on or dominated by few buyers; Secondly, if the
products or services are standard or not differentiated, the buyers can
easily find alternative suppliers; Thirdly, if the purchase of the
products or services occupies most of the buyers purchases or the
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buyer earns low economic profits, they are likely to be higher price
sensitive and demand lower prices. Finally, the buyers may be very
threatening when they have the ability or skills to integrate backwards
and become the suppliers themselves. They can obtain better
bargaining positions because they can be potential rivals and compete
with the supplier.
S u m m a r y
The five forces framework is useful for analysing the structure of an
industry. Brandenburger (2002) praises Porters model for building a
clear vertical chain of economic activities running through the main
players of the chain, from suppliers through business entities and
then to the buyers. The analytical framework can help a firm
comprehensively analyse its industry as a whole (Porter, 1980). A firm
can develop an effective strategy to counteract the negative effect
resulting from the five forces after fully understanding the five
features of the industry (Porter, 1985). The dominant forces are
different from industry to industry and from country to country. The
stronger the competitive force or forces influence the profitability of
an industry, the greater the importance of them in determining the
strategy (Porter, 1979). The genuine advantage of this approach is to
help managers to assess the five forces operating in the industry and
thus to develop a broader insight into the market environment.
2 .2 I n te rn a l A n a l y si s
Having analysed a firms macro environments and industry structure,
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the internal strengths and weaknesses can certainly not be neglected.
Knowledge of the companys capabilities and of the cause of the
competitive forces will highlight the areas where the company should
confront competition and where avoid it (Porter, 1979:143). Porter
suggests that a firm can determine which market to compete in or
avoid after fully understanding the power of the five forces and the
strengths of the firm. In other words, after analysing the industry
structure, it is essential for a firm to realise its strengths and utilise
them well to deal with the five forces and generate competitive
advantages.
Strengths for a firm may include brand reputation, innovative
technology, strong distribution channels, large market share, etc. In
order to develop an effective strategy, a thorough understanding of
the strengths and weaknesses of the firm is required. Traditionally,
SWOT analysis is used to identify a companys external opportunities
and threats as well as the internal strengths and weaknesses. In
comparison with SWOT analysis, the resource-based view mainly
focuses on the firm resources and examines the relationship between
the internal resources of a company and the level of its performance
(Barney, 1991).
2.2 .1 Resour ce-Based V iew Ana lys is
Wernerfelt (1984) was the first to articulate the resource-based view.
He argues that the key resources controlled by a firm allow it to
achieve sustainable competitive advantages. Barney is one of the late
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contributors and he explicitly discloses the four characteristics of key
firm resources (Barney, 1991, 2007).
The resource-based view of a firm puts emphasis on the resources
controlled by a firm and regards them as the source of competitive
advantage (Barney and Hesterly, 2006). A resource is meant as
anything which could be thought of as a strength or weakness of a
given firm or those (tangible and intangible) assets which are tied
semi-permanently to the firm (Wernerfelt, 1984: 172). Barney
(1991:101) defines that firm resources include all assets, capabilities,
organisational processes, firm attributes, information, knowledge, etc.
controlled by a firm that enable it to conceive and implement
strategies that improve its efficiency and effectiveness. Therefore,
they can be regarded as the strengths of a firm. Firm resources are
tangible or intangible. Tangible resources are physical resources, such
as facilities and equipment, while intangible resources include
know-how, a firms culture, and reputation.
On the other hand, resources can be classified into four categories:
financial capital resources, physical capital resources, human capital
resources, and organisational capital resources (Barney, 2007).
Financial capital resources are those that can be used as money
resources to support the strategies, including equity, retained
earnings, and debts. Physical capital resources include machinery,
geographic locations, and buildings. Human resources contain
knowledge, experience, and human training. Organisational capital
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resources comprise organisational culture, structure, and informal
systems. However, it should be noted that not all aspects of financial,
physical, human, and organisational capital are able to contribute to
competitive advantages and to be considered resources (Barney,
1991). Some of a firms capital may have no influence on the process
of shaping and carrying out competitive strategies while others may
lead to inefficient strategies.
The internal view suggests that obtaining competitive advantage
mainly relies on the resources controlled by the firm. Companies who
command valuable resources or have distinctive capabilities that few
firms have, may gain sustainable advantages. However, the
consequence is based on two assumptions (Barney, 1991). Firstly,
resources are assumed heterogeneous. Firms operating in the same
industry may have different stock of resources. They may differ from
each other in terms of the different resources they hold. Some firms
may excel in the rest of the industry in some specific activities.
Secondly, he assumes that the resources are immobile. Some
resources may not be perfectly mobile among firms and it may be
expensive for rivals to imitate or develop them. Therefore, the
resource differences may last a long time. However, it should be
noticed that sustainability is determined on the basis of the likelihood
of the competitive advantage being duplicated (Barney, 1991). This is
opposes of Porters (1985) definitions, as he defines sustainable as a
competitive advantages that can last a long time.
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Naturally, not all the resources have the ability to generate
competitive advantage. There are some characteristics of firm
resources that allow them to create competitive advantages. Barney
(1991) develops a tool to test whether the different resources
controlled by firms have the potential to produce competitive
advantage. By doing this, a firm can determine its internal strengths
and weaknesses. He suggests four features that must be
simultaneously held by potential resources: the resource must be
valuable, rare, imperfectly imitable, and not be equivalently
substituted.
Charac te r is t ics
1. Value resource: Resources are valuable when they are able to help
a firm conceive and implement strategies that can exploit
opportunities or neutralise threats and enhance its performance
(Barney, 1991).
2. Rare resource: Furthermore, the valuable firm resource should not
be held by a large number of firms. If such a resource does not solely
belong to a firm but is simultaneously owned by many firms, it is
useless for generating competitive advantages.
3. Imperfectly imitable: In addition, the resources are needed to be
imperfectly imitable. That is to say other firms are not able to copy
and acquire their value and rare resources. There are three conditions
under which the firm resources can be imperfectly imitable. Firstly,
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the resource is closely tied up with a firms history or specific historical
circumstances. With the development of a firm, it obtains knowledge,
accumulates experience, develops operating systems, and thus
cultivates unique resources. Secondly, the resource has casual
ambiguity. The uncertainty of the causal relationship between the
resources and effective performance limits the imitation of rivals.
Rivals do not know what and how to copy it since they do not
understand the causal links between the actions and performance.
Finally, the resource is socially complex and it is hard for firms to
utilise their ability to manage and affect it in a planned way. A case in
point of this is the organisational culture (Barney, 1986).
4. Not equivalently substitutable: There must be no alternative
resources that are equivalent substitutes. Rivals with this kind of
substitute resource that can deliver the same effect and can conceive
and implement a similar strategy in different way to compete with the
firm in the same market. Therefore, the firms competitive advantage
will vanish.
2.2 .2 Resour ce Por t fo l io Chang e
Resources that have possession of the four foregoing attributes are
called VRIN (value, rare, imperfectly imitable, and not equivalently
substitutable) resources (Barney, 2007). The resource-based view
discusses the links between the firm resources and firm performance
and indicates that firms can generate competitive advantages with
firm resources. However, a firm cannot achieve advantages merely
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because they have abundant resources. In practice, a firm needs to be
able to manage and combine the resources and apply them to
strategies to achieve competitive advantages. In other words, a
company must be organised to fully exploit the VRIN resources. This
corresponds to the integrated framework, the VRIO framework,
introduced by Barney and Hesterly (2006) to supplement the VRIN
framework. O represents organisation and puts emphases on the
complementary resources, such as policies and process, which can
facilitate the most use of VRIN resources.
Moreover, from a long-term view, strategies need to be adjusted over
time in compliance with the changing environments. The values of
resources may perish or disappear as the environment changes.
Therefore, in addition to protecting the existing resources from being
imitated, it is essential for firms to pursue new resources in the
evolvement of the strategies to maintain long-term competitive
advantages (Ambrosini, 2007). In other words, the competition in a
market may lead to the change of firm resource portfolio over time.
2 .2 .3 Fi rs t -Move r Advan tages
Many empirical studies illustrate that pioneering firms acquire
superior resources and capabilities, enjoy the first-mover advantages,
and thus generate higher levels of market share and financial
performance than later entrants (Frawley and Fahy, 2006). First
movers are considered to have the ability to seize or appropriate
various kinds of resources in advance of other rivals. These
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advantages contribute to the ability of early entrants to earn positive
economic profits and are defined as the first-mover advantages
(Lieberman and Montgomery, 1988, 1998). The first mover may be
able to forestall various types of resources. Lieberman and
Montgomery (1988) argue that there are three key sources bringing
about first-mover advantages: technological leadership, pre-emption
of assets, and buyer switching costs.
The technological leadership advantages result from successful
patents and R&D and the learning or experience curve advantage.
The first-mover can take the lead in developing the technology critical
to the industry. Moreover, if the technology can be patented or
protected from being imitated by rivals, the first mover can gain
advantages. However, patents are useless in some industries and in
some countries where the technologies are easy duplicated by the
followers. The study of Levin et al (1987) indicates that advantages
derived from patents are less important than the learning curve
advantages. The learning curve advantages arise when the costs fall
with cumulative output. The pioneers can gain low cost positions if
they can maintain a major market share and when the learning can be
kept proprietary (Lieberman and Montgomery, 1988). Moreover, the
learning curve advantages can create considerable entry barriers
under certain conditions (Spence, 1981).
The first mover may gain advantages through pre-occupancy of rare
resources. These assets may be non-mobile or mobile physical assets
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(Lieberman and Montgomery, 1988). The non-mobile assets consist
of natural resource deposits and superior locations while the mobile
assets include employees, distributors, and suppliers. However, the
advantages derived from mobile human resources are considered
difficult to maintain. Moreover, the pre-emption of prime positions in
space is another kind of advantage, such as the geographic space, the
product space, and the technology space. First-movers can establish
and strengthen their positions by occupying superior geographic
locations or broadening product lines to minimise the space available
to the followers (Lieberman and Montgomery, 1998).
First movers may be able to influence the purchasing manner of
consumers and consumer preferences may be moulded to favour the
first entrants products (Lieberman and Montgomery, 1998). The late
entrants need to spend more resources than first entrants to attract
customers from the pioneers on the grounds of the buyer switching
costs. Switching costs include the money and time spent in adapting
to the new products. First-mover advantages arise when the
switching costs are high. Furthermore, early entrants may generate
value when buyers have imperfect information about the product
quality. It is reasonable for customers to adhere to the brands that
satisfy them for the first time. Therefore, it is easier for pioneers to
pre-empt customer perception and generate brand loyalty than late
entrants. The empirical studies of Kardes and Kalyanaram (1992) and
Carpenter and Nakamoto (1994) demonstrate that the entry order
may influence consumers perception of brands and influence the
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consumer preference formation. First entrants may be able to
establish a unique position in the minds of buyers.
2.2 .4 The Syner gy o f FMA and RBV
Even though the first-mover advantages (FMA) are broadly discussed
in literature, it is criticised for being overly general. As a focus for
empirical research, the concept of first-mover advantage may be too
general and definitionally elusive to be useful (Lieberman and
Montgomery, 1988:52). For further work, Lieberman and
Montgomery (1998) suggest synergy with the resource-based view
of the firm (RBV).
Both FMA and RBV are distinguished current research approaches.
FMA is considered too general and lacking in a theory base while the
RBV is criticised for the absence of empirical studies on the
accumulation of resources and capabilities over time (Porter, 1991).
The combination of FMA and RBA can complement each other and
work jointly for further studies. The resource-based view provides the
framework for the deeper and more complicated studies of the entry
order. Conversely, the empirical studies on first-mover advantages
offer practical knowledge of the evolution of firm resources and
capabilities and provide potential research aspects for the
resource-based view (Lieberman and Montgomery, 1998). Kerin et al
(1992) also approve of using the resource-based view as studying the
first-mover advantages needs insights into a firms resources and how
they are transformed into advantages. Therefore, it would be
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beneficial if the research regarding first-mover advantage is
repositioned within a wide theoretical framework of the
resource-based view.
First-mover advantages occur within a multiple process and it is
assumed that there must be some asymmetry between competitors
that the early entrants can exploit (Lieberman and Montgomery,
1988). In other words, the first-mover advantages arise when the first
entrant owns some exclusive resources in comparison with other
firms. This is corresponds to the statement of the resource-based
view. Barney (1991) argues that for the existence of first-mover
advantages, the competing firms must be heterogeneous in the
resources they possess. That is to say, if the firms in an industry are
homogeneous in terms of the resources they hold, it is impossible for
any firm to acquire the advantages from early entry.
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Chap t e r 3 : Me th odo logy
3 .1 I n t r o d u ct i o n
A proper methodology must meet the needs and criteria of the
research. There are many kinds of research methods. Every approach
has its own advantages and disadvantages. The following section
introduces a variety of research methods available and illustrates how
this research is undertaken.
3 .1 .1 Quan t i t a t i ve and Qua l ita t i ve Meth ods
Generally, there are two types of methodologies, the qualitative
method and the quantitative method. Quantitative research focuses
on statistical analyses and picks samples at random from a given
population. Conversely, qualitative research engages in improving the
understanding of a phenomenon and needs to select the participants
purposefully (Polkinghorne, 2005). The primary function of using a
quantitative approach is to provide comparable numeric data by
which the researcher can draw conclusions. It can avoid subjective
interpretations and personal perceptions to a certain degree and
generate objective outcomes.
Van Maanen (1983:9) defines the qualitative approach as an array of
interpretative techniques which seek to describe, decode, translate
and otherwise come to terms with the meaning, not the frequency, of
certain more or less naturally occurring phenomena in the social
world. In other words, the primary task of the qualitative approach is
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to congregate a general idea rather than quantify individual
experiences. The data gathered by qualitative research is narrative
and descriptive rather than numeric and depends on researchers
explanations to develop the ideas.
The scientific method is a systematic step-by-step procedure
following the logical process of reasoning (Clover and Balsley,
1984:19). There are two kinds of reasoning, inductive reasoning and
deductive reasoning. Inductive reasoning is utilised to establish a new
theory while deductive is used to test an existing theory. Deductive
reasoning starts with an existing generalisation and tries to test
whether it can be adopted by a specific case (Clover and Balsley,
1984). Inductive reasoning tries to reach a general conclusion by
studying many individual cases (Hyde, 2000). Qualitative research
usually adopts inductive reasoning whereas quantitative research
usually applies deductive reasoning (Yin, 2003a).
3 .1 .2 W hy Qua l ita t i ve Meth od
The selection of research methods depends on the research question
to be explored. The aim of this research is to examine the relationship
between the order of entry and the firms performance in terms of the
resource-based view. For the purpose of this study, the research
needs to take into account the evolution of a firm and explore the
accumulation of its resources and the difference between firms in
industry. Large-sample studies are useless since they can not unravel
the complicated interaction between those variables (Rouse and
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Daellenbach, 1999). If a researcher tries to study two specific cases to
reach a general conclusion, this is the process of inductive reasoning.
Hence, quantitative approaches will not be effective in the research of
competitive advantages, whereas the qualitative approach allows the
researcher to gain comprehensive understanding of the research
issues.
Furthermore, organisational phenomena can be portrayed more
clearly and in detail via qualitative methods (Yin, 2003a). In the study
of firm resources, qualitative approaches enrich their depiction and
help the researcher to disclose the key resources contributing to
sustainable competitive advantages. In addition, most resources
contributing to sustained competitive advantages are intangible and
difficult to assess (Hall, 1993). Given such limitations, Rouse and
Daellenbach (1999) suggest employing qualitative approaches to
analyse the intangible resources.
When exploring the high and low performance of firms, Reed and
DeFillippi (1990) advise applying a case study approach by which
firms can be compared in terms of their performance. Zahra and
Pearce (1990) also support this perspective. A case study approach is
employed in this research for reasons given in the following section.
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3.2 Research Design
3.2.1 Case St ud y
Which approach to use depends on the needs and assumptions of the
research, and must be coherent with the purpose of the research.
Case study is a widely used approach to collect deeper and more
detailed information from organisations and it is believed to be a strict
research strategy (King, 2004). A case study is beneficial for deeply
appreciating and analysing issues. Yin (2003a: 8) in appreciation of
case study states that, its unique strength is its ability to deal with a
full variety of evidence-documents, artifacts, interviews, and
observations. In addition, it is appropriate to use how and why
questions instead of what and how much questions (Hartley, 2004)
because the case study strategy lays stress on examining interactions
between the events rather than finding out context from the research.
Moreover, a case study serves as the best approach to realise the life
in an organisation in detail (Hartley, 2004). These features of a case
study approach cater to the research questions and the purpose of
this dissertation. The proposition of this study is to determine whether
and how a latecomer in an industry can become an industry leader by
exploiting its firm resources.
The development of an industry or a firm and evolvement of firm
resources are very complicated and take a long time. A case study
presents an account of what happens to a business or industry over a
number of years (Hill and Jones, 2007). As a result, it is appropriate to
undertake a case study in this research. Furthermore, the implications
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of the theories are clearer when they are applied to case studies. The
theories help disclose the true nature a firm and allow researchers to
analyse and evaluate the actions or strategies adopted by a firm. The
dissertation is proceeds under the theory of the resource-based view.
The resource-based view will give clear explanations when practically
applied to the case study.
After deciding to adopt a case study, there are still some things need
to be taken into consideration. The research procedure being used
and the organisations being studied are needed to be made clear. The
background and history of an organisation can provide a general
overview and map out its current functions and operations (Hartley,
2004). In a case study, after gaining an overview, the researcher can
start to plan out the research. According to Yin (1994), making a
research protocol is beneficial to collecting data. It provides a
direction for the research and makes every step clear, from the
research theories, the research question, methodologies, to the time
control. Moreover, the protocol is flexible and the researcher can
adjust the strategy in the course of the research. In this research, the
contents, which outline the structure of the dissertation and highlight
the points, are made in advance. However, the contents are flexible
and can be modified in line with the research questions and the
discovery of new information.
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3.2.2 Select ion of Case Com pan ies
The primary concern is how to choose the case study organisations
(Hartley, 2004), whose features need to fit the purposes and the
needs of the research. Moreover, the researcher also needs to take
into account the possession of resources and the time required to
undertake this research to determine how many organisations to
study. Before selecting the cases, extensively researching relevant
articles or the press may be more beneficial than taking a more rash
approach. Yin (2003b) points out that a researcher needs to list the
possible cases in advance and screen which cases can conform to the
topic and to avoid choosing cases that are too specific and confusing
for readers. On the other hand, if the researcher has the ability to
conduct more than one case study, the level of the reliability of the
findings can be enhanced through the comparison (Hartley, 2004). In
addition, for the purpose of comparison, the degree of the contrast
between alternative organisations also needs to be of concern.
Stake (1995) suggests that researchers to organise research issues
into a few research questions. The major research question of this
dissertation is to explore why and how latecomers to an industry can
overcome the inherent disadvantages and successfully come to stand
in a leading position by means of firm resources. Clearly, there are
two players in this research question, the first-mover and latecomer.
Therefore, it is appropriate to use two cases in this research. One
represents the first-mover whereas the other represents the
latecomer. In addition, it is beneficial if the two companies operate in
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the same industry but contrast with each other. Therefore, this
dissertation examines two companies within the same industry.
Rouse and Daellenbach (1999) advise a sample selection process with
four steps. The process starts with the selection of the industry,
continues with the comparison of the firms performance, and ends in
identifying firms with high or low performance. The choice of a specific
industry is important because industry factors affect the strategies of
firms within it (McGahan and Porter, 1997). Identifying the firms with
low and high performance facilitates a clear comparison. Nevertheless,
it should be noticed that gaining a deep knowledge and understanding
of the firms is essential in this process and it does not make sense to
simply select the best and worst performing firms for case study
(Rouse and Daellenbach, 1999).
Two cases are selected from foreign mobile phone manufacturers with
well-known brand names and reputation. Both of them have national
representation and occupy a large number of the market share. There
are considerable differences between business cultures and practices
in the US and Korea. However, the researcher simplifies the cultural
complexity and puts emphasis on the complexity of resources. Both
Motorola and Samsung are leading international mobile phone
manufacturing firms in China. Motorola is the first global mobile
phone producer with a long history in telecommunications to enter
China, in 1987.Motorola dominated Chinas mobile phone market andits market share was more than half during the 1990s (Simpson,
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2005). Motorola took the advantage of being the first-mover and
enjoyed the boom of the mobile phone market. However, due to the
increasing levels of competition, its market share is dropping and both
local and foreign manufacturers are threatening it.
Samsung followed on the trail of Motorola, Nokia, Ericsson, and
Japanese companies when the market had become highly competitive.
The achievement of Samsung in mobile phone industry is remarkable.
It has been active in the mobile phone industry for merely a short
period of time but has jumped to the top ranks of mobile phone
manufacturers. According to the data released by China-based CCID
consulting, Nokia, Samsung, and Motorola were the top three vendors
in terms of the production of mobile phone in China in 2007 (Shen,
2008). In addition, both of them are skilled in the Code Division
Multiple Access (CDMA) model and Motorola had always been the
number one player in Chinas CDMA market. However, Samsung
exceeded Motorola for the first time and predominated the CDMA
market in China in terms of market share in 2003 (Lee and Lee, 2004).
As shown in Table 1, in 2005, Samsung still led the CDMA market, in
terms of sales value, with a market share of 31.16% whereas
Motorola only occupied 10.18% (Hwang, 2006).
Case analysis of Samsung provides a complete description of their
successful take-over of the industry dominance of Motorola. In
conclusion, Motorola and Samsung are selected in this dissertation
because they provide good examples for the concepts to be studied
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and they contrast well with each other.
Table 1 Chinas Mobile Phone Market Occupation by Brand in 2005
Source: DIGITIMES, 2006.
3.3 Sources o f Data
3 .3 .1 Dat a Co l lec t ion
According to Huettman (1993), convincing findings are based on
multiple resources. In other words, using different research
approaches can confirm the credibility. Because data is often
scattered and difficult to find, adopting different kinds of information
collection methods can help researchers to gather the information
required. However, the availability of data influences the type of
information gathered as well as affecting the collection approach
adopted (Clover and Balsley, 1984). Due to the time limitations and
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the difficulties gaining access to the organisations, the sources of data
in this dissertation are mainly external.
In order to make up for the restrictions, the research base is collated
from extensive sources of secondary data. Comprehensive and
comparative data regarding organisations is critical for a full
understanding of competitive advantages (Rouse and Daellenbach,
1999). These resources will serve as the base for further comparison.
Sour ces o f da t a
As mentioned above, the difficulties in gaining access to the sources
of primary information leads a dependency on secondary data.
Secondary data is sometimes more useful than primary data and can
provide vast advantages (McDaniel and Gates, 1999). For example, it
can answer the research questions more economically and can also
help primary data to be interpreted more clearly.
The data collected via many sources, such as textbooks, academic
journals, corporate websites and annual reports, newspapers,
magazines, government websites and business press, are the primary
sources for this dissertation. The data is gathered and arranged in line
with the two mobile phone manufacturers. Different kinds of data are
collected for different purposes. Browsing the company websites and
reading annual reports, journals, and newspapers enables the
researcher to form a general idea of the industry and the firms.
Textbooks and journals are of great help for the literature review. The
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statistics provided on government websites, business magazines, and
newspapers help to map the trends of the industry and gain the latest
information. The review of both firms reports and external articles
offer a different view for comparison.
Eisenhardt (1989) argues that researchers should provide enough
evidence to support their opinions and allow readers to assess and
judge the arguments by themselves. In order to echo this
requirement, the researcher collects the figures, graphs, and the
statistical data in journals, newspapers, commentaries and websites
to enhance the credibility of the study. Numerical data is arranged in
tables or displays to make them clearer and include such things as
rankings and performance indices.
Data co l lect io n
In order to prevent the danger of being overwhelmed by the data, the
resources are carefully checked against the theories and only those
having relevance with the propositions are applied in this study. By
doing this, the bias of early impressions can be reduced to a certain
degree (Hartley, 2004). Moreover, the various kinds of resources and
evidence are reviewed and compared with each other to keep the
consistency of information and avoid contradiction.
In this research, the data is organised around the key theories (five
forces analysis, the resource-based view of the firms, and the
first-mover advantages), the key firms (Motorola and Samsung), and
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the key market (the mobile phone industry in China). Following this
data is examined and reviewed to see it fits the research questions or
not.
3 .3 .2 Lim i ta t i on s
Few resour ces
Barney et al. (2001) suggest a need for longitudinal analysis including
both qualitative and quantitative methods in the study of sustained
competitive advantages. Yin (2003a) also advises that using multiple
approaches and triangulation of data makes for a better paper.
However, given the limited duration of the research, it is challenging
for the researcher to conduct both approaches simultaneously. In
addition, using secondary data makes it difficult to carry out the
research critically as former analysis may influence the current study.
Case s tu dy
Even though the attributes of the case study approach are appropriate
for this dissertation, there are still some limitations and
disadvantages in implementing this technique. The data is collected
via literature research and second hand data regarding the two mobile
phone manufacturing companies and the study is constrained to
Chinas mobile phone industry. In a case study, generalising findings
to other social phenomena is essential (Eisenhardt, 1989). However,
sometimes it is difficult for one particular case to represent a general
view and that research results might not be applied across other cases.
This is the problem of a lack of representativeness (Hamel et al.,
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1993). In the point of Hyde (2000), if a specific case study can provide
sufficient information and have deep concern with the general
phenomena under investigation, it is possible to build a generalisation.
However, every specific case still has its own character and methods
that need to be taken into account when doing research.
In addition, the case study approach is also criticised for its lack of
rigidity (Hamel et al., 1993). The lack of rigidity refers to problems of
bias resulting from the researchers subjective point of view or the
information utilised. Researchers may have their own assumptions or
expectations about the research outcomes prior to the research
commencing. The bias arises especially when the information is
collected through personal observations and explained from personal
viewpoints.
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Chap t e r 4 : Ch ina s Mob i le Phone I ndu s t ry
4.1 The Macro Env i r onm ent o f Ch in a
Before starting out to examine Chinas mobile phone industry, it is
beneficial to understand the framework the industry exists in.
Although China is highly integrated with the world economy and
trades with other countries frequently, almost all economic activities
and large enterprises were owned or controlled by the government at
the beginning of the countrys history. The concentration on heavy
industry was the main driving force of economic development
(Williams, 2005). Nevertheless, China commenced gradually shifting
its economic structure from a planned economy to partial
market-oriented economy in 1978 (McKibbin and Woo, 2003). This
aimed at reducing the states interference in the market and this new
economic structure is undoubtedly a key explanation of the rapid
growth that was observed (Sachs and Woo, 2000). Significant
restructure and reform in China has led to a high average growth,
6.04%, in real per capital GDP in the period of 1978 to 1995
(Walmsley et al., 2006). The more open attitude also reflects
governments confidence in managing market competition and firms
capability to compete (Roseman, 2005).
A very large population is Chinas greatest resource. China has
exploited the competitive advantages in labour -intensive and
export-led manufacturing (Sachs and Woo, 2000). However,
constraints on foreign direct investments are still high and the vast
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bulk of the economy remains controlled by the state (Williams, 2005).
Considerable pressure has been exerted on foreign investors to
ensure technology transfer, especially in the case of joint venture.
This approach allowed domestic firms to acquire or cultivate new
technologies from foreign partners through joint venture or alliance to
enhance production efficiency and performance.
After the economic crisis of the 1980s and 1990s, The Chinese
government came to consider liberation a good therapy for economic
development and has gradually relaxed restraints on private
businesses (Nie and Zeng, 2003). In an effort to boost foreign
investment, China offered a number of incentives, such as reductions
in the rate of income tax. This proved successful and foreign
investment soared in 1993. However, the rate of growth in FDI
dropped in 1996. The absence of a well-regulated market and the
dominance of inefficient state-owned enterprises in some industries
cut down foreign investors confidence in China (Walmsley et al.,
2006).
Chinas accession to World Trade Organisation (WTO) at the end of
2001 helped remedy the fundamental problems within this market,
improve the business climate, and thus promote foreign direct
investment (Walmsley et al., 2006). In the agreement, China is under
the obligation to carry out many dramatic changes in trade-related
policies. The state has to eliminate both tariff and non-tariff barriers
and open the markets of service sectors (Nie and Zeng, 2003). The
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opening-up of the telecommunication sector enlarged the need of
mobile phones, benefiting the mobile phone manufacturers.
In addition, technological development goes hand in hand with
economic growth. With the support of the government, China has
made achievements in many fields. The access to foreign technology
through FDI, joint venture and licensing led to a positive influence on
industrial performance. The rank of China in the CIP (Competitive
Industrial Performance Index) jumped from 61 in 1985 to 37 in 1998.
This rise implies Chinas tight involvement in the global production
scheme (Zhao and Zhang, 2007).
In summary, China has created a more advantageous and
well-regulated business environment for the mobile phone industry in
the recent years. Higher economic performance and the huge
population make it attractive to investors. Technology development
also contributes to the foreign investment. A lower level of limitations
and higher degree of equality make it a favourable place to invest in.
4 .2 Ch ina s Mob i le Phone I ndus t r y
4 .2 .1 Overa l l Si t ua t ion
Chinas mobile phone market has undergone a dramatic development
and become the worlds largest mobile phone market. From Figure 1,
it can be seen that the number of mobile phone subscribers in China
grew gradually year by year between 1995 and 2006. The number of
users has risen significantly from 3.63 million in 1995 to 461 million in
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2006. It can also be seen that there was a significant breakthrough in
2001. The number of subscribers exceeded 100 million and climbed to
144.81 million in that year. In October 2007, the number ascended to
8.132 million breaking the record for single month growth (MII, 2008).
The high-speed growth is still maintained to this day. According to
recent statistics reported by MII (2008), the number of users
increased by 17.941 million in the first two months of 2008 and
reached to 565.227 million. The proportion of the subscribers to
population is also getting higher. However, the annual growth rate has
decreased gradually since 2000, as shown in Figure 1.
Figure 1 Development of Mobile Phone Market in China, 1995-2006
Source: Jin, J and von Zedt wit z, M. (2008) Technological Capability
Development in China's Mobile Phone Industry, pp. 333.
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The telecommunication sector consists of fixed and mobile phone
subscribers. According to Figure 2, the portion of mobile phone
subscribers in the telecommunications sector has increased steadily
since 2000. 2003 was the first time that the number of mobile phone
subscribers surpassed the number of fixed phone subscribers. The
proportion of the mobile phone industry came to 58.9% in 2007 and
China became the worlds largest market in terms of subscribers of
mobile phones.
Figure 2 The Proportion of Mobile Phone Subscriber in China,2000-2007
Source: Ministr y of I nformation I ndustry (MII ) Website
4 .2 .2 Com pe t i t i on be tw een Loca l and Fo re ign Fi rm s
China is the biggest manufacturing base in the world. Nearly half
(46.9%) of worlds mobile phone production, around 970 million units,
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in 2006 came from China (Circuits Assembly, 2007). The main
manufacturing sites are Shenzhen, Tianjin, Beijing, and Suzhou. The
five leading international mobile phone manufacturers, Nokia,
Motorola, Samsung, Sony Ericsson, and LG, have built manufacturing
stations in those areas. These places have constructed a mobile
phone supply chain in China.
Even though Chinas mobile phone market is dominated by
international vendors, the local manufacturers increasingly take the
lions share in this market. The production of mobile phone in China
was up to 279 million units in the first half of 2007. Nokia, Samsung
Electronics, Motorola, Sony Ericsson and LG Electronics contribute to
65% of total production in China. However, the market share of the
foreign manufacturers has decreased by 7% in comparison with the
record of 2006 (Shen, 2008).
In the ever-growing market, both foreign and domestic are competing
for the market share. In terms of domestic firms, price is the focus of
their competition while most of them are targeted at low-end market.
Conversely, foreign firms mainly concentrate on high-end market. The
ability to produce products at low manufacturing cost helps domestic
firms wrest market share from foreign rivals because Chinese
consumers rate price more highly than other features (Lenton, 2003).
Moreover, domestic manufacturers have accumulated a lot of
experience and knowledge through the development of new
technology and the cooperation with foreign business partners. In
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addition, domestic firms are likely to be able to design and provide
diversified mobile phones which fulfil Chinese customers needs. With
regard to sales channels, foreign firms mainly sell their products in big
cities whereas domestic firms prefer to establish their own distribution
channels which cover small and medium sized cities where the
demand of mobile phone is growing due to the increasing disposable
income (Lenton, 2003).
The low price strategy, the high speed of introducing new products,
and the ability to establish sales channels and meet the niche market
outside big cities facilitate the growth of domestic mobile phone
manufacturers.
4 .3 T r igge rs fo r Ch ina s Mob ile Phone I ndus t r y
Continued economic performance and the higher purchasing power of
customers, the deregulation and liberalisation of the mobile phone
market, a positive and favourable regulatory environment, and
increased geographic spread of network services jointly facilitate the
development of the mobile phone industry and drive mobile phone
penetration in China.
4.3 .1 Econom ic Deve lopm ent
With the rapid economic development, Chinas position on the
international stage is getting more and more important. Since the
start of a serious of reforms in 1978, China has achieved remarkable
average annual growth rates of gross domestic product, as shown in
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Table 2. This impressive economic performance has significantly
altered Chinas economic and social structure. A large proportion of
the labour force working in agriculture declined from 70.5% in 1978
to 44.8% in 2005 (National Bureau of Statistics of China Website,
2008). Chinas reduction of state control and monopoly power
resulted in fast entry for new firms. Furthermore, the open attitude
has attracted a large number of foreign direct investments and China
became the largest recipient of FDI in the world in 2003 (National
Bureau of Statistics of China Website, 2008). China has gradually
integrated with the world economy more tightly.
Table 2 presents Chinas average annual growth rate of GDP between
1978 and 2005. China reached a significantly high growth rate in 1984
and 1992, with an annual growth rate of 15.2% and 14.2 respectively.
Although there are some fluctuations during this period, the economic
performance is still astounding. In the face of the severe Asian
financial crisis in 1997, China remained strong and maintained a high
growth rate in the following years.
The continued economic growth has led to dramatic changes in
peoples lives and consumer behaviour. With increasing Gross
Domestic Product (GDP), the dominant income and peoples
purchasing power are greater than ever. Higher purchasing power
means people are more likely to pay for quality and expensive
products. The mobile phone is an example. In addition, the first time
buyer is rapidly increasing in China. Therefore, increasing economic
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growth plays a key role in promoting the speedy development of
Chinas mobile phone industry.
Table 2 Chinas Economic Growth, 1978-2005
Ye ar % Ye ar % Ye ar % Ye ar %
2005 10.2 1998 7.8 1991 9.2 1984 15.2
2004 10.1 1997 9.3 1990 3.8 1983 10.9
2003 10.0 1996 10.0 1989 4.1 1982 9.1
2002 9.1 1995 10.9 1988 11.3 1981 5.2
2001 8.3 1994 13.1 1987 11.6 1980 7.8
2000 8.4 1993 14.0 1986 8.8 1979 7.6
1999 7.6 1992 14.2 1985 13.5 1978 11.7
Source: National Bureau of Statistics of China Website, 2008
4.3 .2 Govern m ent Po l ic ies
The governments presence in Chinas mobile phone market strongly
effects and shapes the development of this industry (Nie and Zeng,
2003). The regulations and policies manipulate every movement and
every action of key players in it. In the past, the mobile phone
industry was regarded as a development priority and preferred by the
Chinese government (Jin and Zedtwitz, 2008). The government
supplied much support and domestic manufacturers were driven to
invest in technology development to compete with leading foreign
mobile phone manufacturers.
Furthermore, the states decisions can lead to a significant impact on
the success or failure of a firm. For instance, the national technology
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of telecommunication is decided by an authorised institution, the
Ministry of Post and Telecommunications (MPT). Only the interior
technologies of the products that are in accordance with the national
standards can get access to the market (Nie and Zeng, 2003).
Motorola suffered a great loss from the states adoption of GSM
technology, the European technology, instead of CDMA technology,
the American technology, in the transition from analogue to digital
mobile communication technology in 1994 (Business China, 1998).
During the following years, Motorola lost its leading market position.
Nokia outstripped the big rival and increased its market share at the
expense of Motorola.
However, the environment has improved and the governments
attitude became neutral after some needed reforms were made by the
state. In 1998, to promote open an environment and fair competition,
the Chinese government established the Ministry of Information
Industry (MII) as the administrative entity in charge of the
information technology related industries. MII receives and carries on
the affairs and business of many formal institutions; such as the
Ministry of Post and Telecommunications (MPT), the Ministry of
Electronic Industry (MEI), etc. Mobile phone manufacturing is also
under the control of MII (Nie and Zeng, 2003). MII is in charge of the
market through industry standards, regulation, and equipment
inspection (Low, 2005). The institutions reforms have strong
influence on the business practices in the mobile phone industry. In
terms of foreign companies, for example, building a good relationship
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with MPT and technology transfer is no longer a price for operating in
China (Nie and Zeng, 2003).
On the other hand, the influence of the Chinese government on the
mobile phone industry is getting looser as time goes on. After Chinas
formal accession to the World Trade Organisation (WTO) in November
2001, mobile phone service became open to foreign investors and the
tariff barriers and non-tariff barriers reduced. This opening of
telecommunication services provides huge opportunities for
international mobile phone manufacturers and reduces the risks of
doing business in China (Low, 2005). Moreover, it is expected to
create more demand for mobile phone production and thus increase
market competition (Nie and Zeng, 2003). With the open attitude
towards telecommunication service market, the Chinese government
issued more licenses to both domestic and foreign services providers
(Nie and Zeng, 2003). This has benefited not only service suppliers
but also manufacturers because the more service suppliers available,
the more the demand for telecommunication equipment.
In summary, it can be seen that initially the state actively participates
in and facilitates the development of the mobile phone industry.
However, after a series of reforms and liberation, the government is
gradually vacating the foreground and supporting the market
economy from behind. The mobile phone industry grew under the
control of the Chinese government; however, it still flourishes even as
the government loosens its grip.
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4.3 .3 Other Fac to r s
The favourable business and marketing environment in terms of the
global, country, and local market levels can foster growth and the
diffusion of the products (Kotler et al., 2005). With the liberation and
deregulation of the mobile phone market and the rise in purchasing
power resulting from continued economic growth and purchasing
power, the approving environment drives the prosperity of the mobile
phone industry.
However, there are still many other factors facilitating the growth of
this industry. Competition between mobile telecommunications
operators is also one of the major driving forces. Fierce competition
between system suppliers has led to the reduction of mobile phone
connection fees. Lower expenditure also promotes the dispersion of
mobile phones (Zhang and Prybutok, 2005). On the other hand, the
mobile phone now symbolises a personal lifestyle rather than a
communication tool. The emerging technology enhances companies
capabilities to incorporate new features in mobile phones to
differentiate with other products to attract consumers and gain a
market share in an almost mature market. This factor partly
contributes the success of domestic manufacturers in Chinas mobile
phone market. The speed of the introduction of new products rise
represents the high competitive situation in this market. Therefore,
the technological development and the intense competitive
environment also contribute to the penetration of the mobile phone.
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4.4 Char ac te r is t ics o f Ch ina s Mob i le Phon e I ndu s t r y
4 .4 .1 H igh ly Techno logy Concent r a ted
Developing and improving technical skills and knowledge to respond
to the dynamic business environment are of vital importance to
manufacturing companies in high-tech industries (Jin and Zedtwitz,
2008). The mobile phone industry is no exception. Technology plays
an important role in the developing history of the mobile phone
industry, especially from a strategic perspective. Furthermore, in the
developing countries, governments stress the point in particular on
the grounds of its strategic role in competitive advantage (Lall, 1990).
The development and quick progress of underlying technologies in
Chinas mobile phone manufacturing industry are mainly transferred
or learned from foreign mobile phone manufacturers (Jin and
Zedtwitz, 2008).
In the case of telecommunication systems, technology has made
progress from 1G to 3G in nearly two decades, from analogue to
digital technology. The first generation (1G) technology is Total Access
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