Technological Innovations -Theories and industry cases

Olli MartikainenAutumn 2018

What we expect you to learn

• Technological life cycles• Phases of innovation• Dominant Design• Technological Systems• Competence Block• Standardisation• Essential patents• Nokia Case

Innovations come in two phases:product and process innovations

(also: technology and diffusion phases)

Case Nokia

1980 1990 2000 2010

How NMT wasdeveloped?

Why Japanese firmsfailed in GSM?

Why Nokia failedin smartphones?

Why GSM wasa success andhow Nokiaentered GSM?

Pictures source:Salon elektroniikkamuseo

Some Terminology

• Invention is a new device, method, process or work of art. In patenting the so-called inventive step is required: ”Not obvious to an expert in the field.”

• Innovation is an invention that has commercial potential. In patenting the innovation must be ”industrially applicable”.

• A patentable invention is the concrete embodiment of an idea (a device, a product, a process for making a product, for instance, or a new use for a previously existing product) which is new, has inventive step and is industrially applicable.

Two Viewpoints of Innovations

• Technological Life Cycle View– Interested in the evolution of a technology, how it

is realized in products and how it is taken into use• Systemic View

– Interested in the prerequisites of the success of innovations, what is needed for an innovation to become a successful product. This may include patenting, entrepreneurship, financing, partnerships etc.

• (There are also other views which we explain later)

Life Cycle View of Innovations

1 2 a 2 b 3

Degree ofmaturity

or

Performance

or

Cumulative Adoption

of Technology

Maturity

Initial optimization

Diminishing returns to innovation

Radical Innovation Phases

Time

EMBRYONIC GROWTH BREAKTHROUGH MATURITY

Source: Taylor & Taylor 2012

Technological Life Cycle ”Technology S-curve”

AGEING

4

Shortening of the life cycles of technologies in the US automobile industry

100%

1950 1960 1970 1980

Percentage of output

incorporating the innovation

1990Source:Grubler, A. (1990): The Rise and Fall of Infrastructures, Heidelberg, Physica-Verlag. ABS and CAN added later.

Innovation Phases inside Life Cycle

Sources: Utterback and Abernathy, 1975and Abernathy and Utterback, 1978

Innovation Phases inside Life Cycle• Product innovation is a new technology or combination

of technologies introduced commercially to meet a user or a market need and starts a new technology life cycle

• As the product life cycle evolves competition increases, product variety tends to be reduced and the product performance becomes standardized

• Process innovations are stimulated by the increasing competition that demands more cost effective production processes which also may be more capital intensive

• This in turn reduces the number of manufacturers which become larger and often the industry becomes an oligopoly

Innovation Phases inside Life Cycle

Sources: Utterback and Abernathy, 1975and Abernathy and Utterback, 1978

Small firms dominateLarge firms dominate

Dominant Designemerges

Amount of firms decreases

Innovation PhasesSmall firm:Bill Gates and PC in 1983

(Source: Academy of Achievement)

Large firm:Microsoft has 131 300 employees in 2018

(Source: YLE)

Dominant Design• Dominant Design in a product class is the one that wins the

loyalty of customers in the marketplace • The competitors and innovators must adhere to the

dominant design if they want to stay in the market, and this will often result in the dominance of larger firms

• The IBM PC was a typical example as a dominant design in personal computers. There was not much breakthrough technology but it brought together the essential elements for users

• Note: IBM PC created an Industrial Standard• New digital management approaches such as flexible

automation will increase the interrelation of product and process innovations (see Sanchez 1995)

Source: Koski & Kreschmer, 2007

Nokia Communicator

Source: Matkaviesti 1996

Nokia Communicator was the firstSmartphone. An early prototype was developed in NRC (Innopoli officeat Otaniemi) during 1987.The product development took 6 years and the first Communicator 9000 wasreleased in 1996.

The article says: ”This is neither a phonenor a computer. .. Probably these deviceswill be used by most people in the future.”

Nokia Turnover 1994-2000

0

5

10

15

20

25

30

35

1994 1995 1996 1997 1998 1999 2000

Nokia Sales (Eur billion)

Nokia ”Dream Team” 1998

Management Board 1998:Front row left: Matti Alahuhta, Sari Baldauf, Jorma Ollila and Pekka Ala-Pietilä. Upper row left: Olli-Pekka Kallasvuo, Veli Sundbäck, Yrjö Neuvo, Anssi Vanjoki and Mikko Heikkonen.

Source: Iltalehti 2010

Nokia related to the Finnish GDP

0

10000

20000

30000

40000

50000

60000

1970 1980 1990 2000 2010 2016

Finland

Germany

Sweden

UK

USA

GrossDomesticProductGDP perCapita(in USD)

NokiaMobile growth

Nokia Mobile collapse

Source: Maddison Project Database, version 2018. Bolt, Jutta, Robert Inklaar, Herman de Jong and Jan Luiten van Zanden (2018),

In 2008 Nokia turnover wasequal to the Finnish GDP butin 2012 it was only one third

Systemic View of Innovations• By a system we mean a network of interacting entities• First system view for innovations was the industrial district

by Marshall (1890)• Innovations are often based on knowledge spill-overs inside

an innovation system• Technological system is a network of players in certain area

with knowledge and innovation networks (Carlsson & Stankiewicz 1991)

• Innovation system is a technological system with educational and financing functions (first presented by Lundvall 1985)

• Ecosystem is a global technological system (Moore 2007, Adner 2017, discussed more later)

Competence Block

• Compence Block creates a systemic view of firms and explains the selection of winners and losers

• Actors necessary in the competence block1. Competent and active customers 2. Innovators who integrate technologies in new ways 3. Entrepreneurs who identify profitable innovations 4. Competent venture capitalists who recognize and

finance the entrepreneurs 5. Exit markets that facilitate ownership change 6. Industrialists who take successful innovations to

industrial scale production

Source: Carlsson & Eliasson 2003

Nokia in the Finnish and European Innovation Systems

Nokia case – Systemic View

• We consider the Finnish ICT sector as a local technological system

• Banking and telecommunication were local oligopolies and the profits were used in new technology investments in 1970s and 1980s

• Competitive technologies were available from the US manufacturers (PCs, LANs, router networks and Value Added Network (VAN) service equipment)

• However, mobile networks followed the Nordic NMT standard

How innovations were born?

• In 1950-1970 own software was developed for US computers in Banking, Insurance and Forest industries

• In 1970-1991 the new ICT core of Finland was created• The Banking sector competed with investing in new

offices and new services – Digital modems– Mikromikko and Netnet

• Telecom sector competed with new services– Value added data and voice – Mobile services – NMT Nordic Mobile telephony– Router networks - Datanet– GSM, SMS and WAP

• Both sectors used part of the profit for developing new services in the opening competition

(See “Interviews on ICT innovations” in the Annex)

How innovations were born?

Industry competitive phases:Closed Open GlobalCompetition Competition Competition

Industry

newtechnology

innovationsSectoralprofitindex

Time

How innovations were born?

1970 1980 1990 2000 2010

Banking Telecom

What next?

Nokia &othersMinisPC

Nokia &othersModemsLANTiimi

Value Added Services Mobile networks NMTDatanetGSM, SMS; WAPDigital

technology

1983 Tekes Nokia growth Nokia Mobile---- Catching up phase ---- collapsed

1970's learning by doing• New infrastructure investments created ICT competence

– 1920's - telephone network automatization (Siemens, Ericsson)– 1960's - 1980's network digitalization (Siemens, Ericsson, Nokia)– 1970's - 1980's investments in banking created modem industry (Nokia)

• Government investments supported Finnish telecom industry– 1960's - 1970's Salora Mobira, Televa, Telefenno, Nokia– 1980's digital and NMT network investments by Finnish Telcos

• Establishment of the National Technology Agency in 1983 (Tekes)– New technology R&D-programs created complementary competences in

microelectronics and systems/embedded software (Nokia and GSM)

• Deregulation and global mobile market growth threw Finnish telecom and software industry into fast growth in 1990's

1980-1991 creating competencies

• Banking sector connected local offices to mainframes using digital modems from Nokia - Nokia modems became the largest in Europe 1983

• Nokia providing PCs and LANs to the banking sector• Sonera as a demanding customer for DX200 and NMT and

an importer of new services and technology from USA• Nordic Mobile Telephone (NMT) – Mobile phones from

Mobira and switches later from Telenokia – Mobira became the largest NMT phone supplier in 1985

• Nokia GSM development started 1986

Nokia Case

• The case of Nokia and GSM by Palmberg & Martikainen 2003 https://www.etla.fi/wp-content/uploads/2012/09/dp855.pdf:

• Which were the crucial GSM-related technologies and competences enabling Finnish telecom/Nokia to enter and achieve a strong position in the GSM market?

• Could these technologies be characterized as discontinuous, when, where and how were the related competences developed?

• Contributes on firm adaptation to standardization/discontinuity in a crucial period in the history of this firm.

Nokia Case• EU developed GSM standards by asking industry to make

proposals and organized were competitions between the proposals, e.g. radio competition in 1987 in Paris

• European Standards Institute (ETSI) was established to publish and coordinate the new standards

• Several industry groups proposed complete GSM standards• ETSI took parts of these and combined the parts to ETSI

GSM standard (not to give advantage to any special proposal) => the Basket Model

• The Basket Model pushed industry to create partnerships which owned as many parts as possible

• Nokia entered into the ECR900 consortium with AEG and Alcatel

Nokia GSM case chronology

Source: Palmberg and Martikainen 2003

FINPRIT research team 1983 in VTT Espoo

Team members having coffe break in Otaniemi water tower (3rd and 4th floor).The CVOPS protocols tools used in GSM development were developed here.

NRC protocol team 1997 at Innopoli Otaniemi, they participated later in ECR900

Source: Tekniikan Tie, October 1987

Nokia Case discussionOvercoming the discontinuities - from Palmberg & Martikainen 2003 (for reading:)https://www.etla.fi/wp-content/uploads/2012/09/dp855.pdf

• Confirmation of casual observation – the GSM introduced discontinuities ála Tushman & Anderson (1986):

– digital signal processing (DSP)– manifold increase in system and component software (e.g. NMT-phone 20 kLOC, GSM

500 kLOC)…the GSM as the ‘Global Software Monster’

• Nokia and related firms new entrants in cellular system market, although ‘accidental incumbents’ in the underlying technolgies/design space:

– digital roots in Pulse Code Modulation (PCM) techniques in the 1960s and 1970s– amongst the European market leaders in DSP-based datamodems in the 1970s and

1980s

• Mobira as the entrepreneur and intermediator, realising business opportunities: – an early mover in the ‘wireless fringe’ market (early mobile phones)– the role played by the PTT as a competent customer (same story in NMT, see Palmberg

1998)

…overcoming the discontinuities (for reading:)

• Intertwined emergence of GSM related competences and public research infrastructure –fortunate timing above all…:

– from small to large – critical mass achieved at the right time (NCS, NRC, NMP)– VTT showed well timed interest in embedded software, IC and DSP applications– SEE program at Oulu – Oulu as a success story in it’s own right– Tekes FINPRIT program – the importance of systematic process innovations!– density rather than size of networks – spillovers through technological gatekeepers

(Allen 1977)

• Serendipity should not be ignored:– standardization process took many turns favourable to Nokia

• choice of narrowband TDMA favoured the ‘Nordic camp’• the 1987 basket model and the ECR900 consortia as Nokia’s ‘entry ticket’ to the

global telecom scene– critical moments of GSM coincided with collapse of Soviet trade – resources freed– a guardian angle at managerial level during times of crises in early 1990s (…or pure

ignorance)?Source: Palmberg and Martikainen 2003

ECR900 team

ECR900 test system

Source: Tuike 8/1991

MTX was in microVAX

Essential patents and Dominant Designs

Essential patents• When a patent covers some issue related to a standard,

the patent is called essential• When standards are developed the participating firms

have interest to include features that are under their patents

• In GSM development EU regulated that all essential patents related to the GSM standards managed by ETSI must be licenced to all requiring partners

• The license fees were set by the patent owners• This lead to the exchange of patent portfolio licenses

between the major firms• Firms outside this regime had high entry barriers to GSM

Essential GSM patentsGSM

NokiaEricssonInterdigitalMotorolaOthersQualcommPhilipsBTAT%TAlcatelSiemens

4112Source: ETSI

Japanese firms were not able to exchangelarge patent portfolios and had to pay fulllicense fees

Essential GSM patents

050

100150200250300350400

syste

mradio

code

c/rvo

ice

spee

ch

chan

nel(s)

hand

over

roaming

SIM/ca

rd

GSM

NokiaEricssonMotorolaQualcommInterdigital

Source: ETSI

Essential patents, UMTS and 3GPP

3GPP

NokiaSamsungQualcommMotorolaNortelToshibaEricsson

UMTS

QualcommNokiaInterDigitalPhilipsNECMotorolaSiemensAlcatelHuaweiASUSTeKMitsubishi

2379

6875

Source: ETSI

Essential patents hindered competition

Vertical GSM-service provisioning based onSIM-card + UMA, OMA

Disruptive pointspossible:

-Applications-Consumer-VoIP-Office

-Terminal OS

-WLAN, WiMAX

-IP network

-Google, Ebay, -Skype -”Web-telco”

Incumbent strategy prevented disruption by

-Segment and bundle

-USIM and OMA

-Block interfaces

-Better radio 3G->4G-Universal Mobile Access (UMA)

-Roaming-Open Mobile Architecture (OMA)

-Partner -Bundle

HORIZONTAL SERVICES

IP BASED NETWORK

HORIZONTAL ACCESS

Mob

ileop

erat

or

Ntw

vend

orTe

rmin

alve

ndor

Vertical GSM-technology basedon GSM patents

New patenting trends(Seppälä and Martikainen 2011).

Source: Martikainen 2006

and prevented horizontal development

New patenting trends 2003-

Casings or constructional details of electronics apparatus

Touch Screen

(Seppälä and Martikainen, 2011)

New smartphone dominant design

In 1975 Apple founders Steve Wozniak and Steve Jobs worked together at Atari.1976 they established Apple Computerand built first computer Apple I. In 1979 the Apple II was introduced: Apple Computer’s first office in 1976.

It was the garage in 2066 Crist Drive, Los Altos.

Sources: http://community.digitalmediaacademy.org/tag/steve-wozniakhttps://en.wikipedia.org/wiki/Apple_Inc.

New smartphone dominant design

Steve Jobs himself referred to the iPod Touch as "training wheels for the iPhone”iPhone introduced in 2007 had iOS operating system, 3,5 inch touch screen, GSM, Bluetooth and WLAN.Bill Gates said once that “Jobs was the best” (recordingin the Interviews :)

iPod digital music player was introduced in 2001 and later it was developed to iPod nano in 2005 and iPod touch in 2007 with iOS (OS X) operatingsystem and WLAN.Mac OS X was originally the operating system fromNeXt Computer by Jobsthat Apple bought 1997. Source. https://en.wikipedia.org/wiki/Apple_Inc.

Apple touch screenpatent 2006

New smartphone dominant designGoogle released in 2008 Android phones to compete with iPhone.The success of iPhones and Android phones was accelerated by their Application markets:

Source: https://play.google.com/storeSource: https://www.apple.com/ios/app-store/

Smartphone OS marketshares

Google Android; 327 164

Apple IOS; 51 993

Google Android; 575

Apple IOS;

3 848Windows

; 3 739

Blackberry; 7 534

Symbian; 17 825

2009 Q1(thousands)

2017 Q1

Summary

• GSM was a great standardization and business success created by the European Union

• Nokia success was based on its experience in NMT and the support from the Finnish telecommunication cluster

• New generation smartphones were based later on new industrial standards, patenting, new operating systems and application market externalities managed by the US enterprises

Interviews on ICT innovationsICT 1950-1990 15 kpl Nokia GSM 44 kpl Nokia Suomen innovaatiojärjestelmässä 61 kplHaastatteli: Olli Martikainen ja Timo Seppälä Haastatteli: Christopher Palmberg, Olli Martikainen Haastatteli: Raine Hermans ja Jyrki Ali-Yrkkö

ja Jyrki Ali-YrkköAhtiHirvonen31082012-1+2(2).mp3 AimoKoski09122002-1(2).mp3 AimoEloholma16062002.mp3 NisseHusberg21122001-1(2).mp3EeroKostamo17082012-1(2).mp3 AimoKoski09122002-2(2).mp3 AnttiMommo14012002.mp3 NisseHusberg21122001-2(2).mp3EeroKostamo17082012-2(2).mp3 ErkkiVeikkolainen02042003-1+2(2).mp3 ArtoKarila07022002-1(2).mp3 OlliMartikainen18012002-1(4).mp3EilaEskola11092012.mp3 HannuKariArtoKarila21112003-1(4).mp3 ArtoKarila07022002-2(2).mp3 OlliMartikainen18012002-2(4).mp3HeikkiTurtiainen07102010-1+2(2).mp3 HannuKariArtoKarila21112003-2(4).mp3 EeroHalonen032002.mp3 OlliMartikainen18012002-3(4).mp3JarmoKalm-MarttiVeikkolainen30102011-1(2).mp3 HannuKariArtoKarila21112003-3(4).mp3 HannuKari22022002-1(2).mp3 OlliMartikainen18012002-4(4).mp3JarmoKalm-MarttiVeikkolainen30102011-2(2).mp3 HannuKariArtoKarila21112003-4(4).mp3 HannuKari22022002-2(2).mp3 PasiPerttula11012002.mp3JussiTuori22052012-2(2).mp3 HeikkiAhava17122002-1(2).mp3 HannuNieminen20122001-1(2).mp3 PauliKuosmanen14012002.mp3JussiTuori22052012-1(2).mp3 HeikkiAhava17122002-2(2).mp3 HannuNieminen20122001-2(2).mp3 PekkaTarjanne27092000-1(2).mp3MattiPeltola2013.mp3 HeikkiLaamanenRistoKari02042003-1(4).mp3 Jaakko Ajanki03012002.mp3 PekkaTarjanne27092000-2(2).mp3MattiSihto20042015.mp3 HeikkiLaamanenRistoKari02042003-2(4).mp3 JaakkoSaijonmaa15122001.mp3 PerttiVainikainen15012002.mp3PekkaRauhala22032013-1(2).mp3 HeikkiLaamanenRistoKari02042003-3(4).mp3 JaakkoSauvola21122002.mp3 PetteriAnnamaa15012002.mp3PekkaRauhala22032013-2(2).mp3 HeikkiLaamanenRistoKari02042003-4(4).mp3 JariIinatti21122001.mp3 RaimoKuismin14042000.mp3PerttiRuosaari05092011-1+2(2).mp3 HeikkiOukka24042003-1+2(2).mp3 JarmoKalm15062002.mp3 SeppoToivonen24052000.mp3TeroLaaksonen06092011-1+2(2).mp3 JormaNieminen23122002-1(2).mp3 JarmoKontro16012002-1(2).mp3 TapioHeikkilä20122001.mp3

JormaNieminen23122002-2(2).mp3 JarmoKontro16012002-2(2).mp3 TeroLepistö17042000.mp3JukkaSoikkeli11122002-1(2).mp3 JormaHäkkinen18122001.mp3 TeroOjanperä20122001.mp3JukkaSoikkeli11122002-2(2).mp3 JuhaKemiläinen09012002.mp3 TimoAkkola21122001.mp3KariTiensyrjä07052003-1(2).mp3 JuhaKostamovaara03012002.mp3 TuroPiila11012001-1(2).mp3KariTiensyrjä07052003-2(2).mp3 JuhaYlä-Jääski21012002-1(2).mp3 TuroPiila11012001-2(2).mp3LauriMelamies17122002-1(4).mp3 JuhaYlä-Jääski21012002-2(2).mp3 YrjöNeuvo18012002RhgJay-1(2).mp3LauriMelamies17122002-2(4).mp3 JuhaniJäämiesRuneUdd19122001-1(2).mp3 YrjöNeuvo18012002RhgJay-2(2).mp3LauriMelamies17122002-3(4).mp3 JuhaniJäämiesRuneUdd19122001-2(2).mp3

Pan-Nordic R&D 2 kpl LauriMelamies17122002-4(4).mp3 JuhaniKuusi09012002-1(2).mp3Haastatteli: Olli Martikainen LauriVatjus-Anttila04032003-1(4).mp3 JuhaniKuusi09012002-2(2).mp3

LauriVatjus-Anttila04032003-2(4).mp3 JukkaRanta06062000-1(2).mp3JuhaniStrömberg13022004.mp3 LauriVatjus-Anttila04032003-3(4).mp3 JukkaRanta06062000-2(2).mp3VeikkoHara11022004.mp3 LauriVatjus-Anttila04032003-4(4).mp3 JukkaSoikkeli19122001.mp3

MarttiKarppinen14022003-1(2).mp3 JyrkiIisakkila2001.mp3MattiHovi18122002-1(3).mp3 KariKurru18122001.mp3MattiHovi18122002-2(3).mp3 KariRuhanen10032002-1(2).mp3MattiHovi18122002-3(3).mp3 KariRuhanen10032002-2(2).mp3MattiMakkonen05122002-1+2(2).mp3 KyöstiRautiola03012002.mp3PekkaHintikka04032003-1+2(2).mp3 MarkkuKiiskinen10012002.mp3PetriPulli14022003-1(3).mp3 MarkkuRenfors03012002.mp3PetriPulli14022003-2(3).mp3 MarttiKarppinen14022003-1(2).mp3PetriPulli14022003-3(3).mp3 MarttiKarppinen14022003-2(2).mp3ReijoPaajanen23012003-1(2).mp3 MattiKarlsson20122001.mp3ReijoPaajanen23012003-2(2).mp3 MikaSaaranen04012002.mp3SamuliSaukkonen28052003-1(2).mp3SamuliSaukkonen28052003-2(2).mp3Timo Ali-Vehmas03022003-1(2).mp3Timo Ali-Vehmas03022003-2(2).mp3TimoHuttunen17032003-1+2(2).mp3

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