The fit between business model innovation and demand-side dynamics: catch-up of China’s latecomer mobile handset manufacturers

Abstract

This paper aims to answer an important question: whether and how, in emerging markets, latecomer firms with limited technological endowments can catch up with industry incumbents that dominate the technological and market frontiers. Adopting the perspective of demand-side dynamics and analyzing the case of China’s mobile handset manufacturing industry between 1998 and 2008, the paper finds that in emerging markets, latecomer firms with limited technological innovation capability are able to achieve market share catch-up by using effectiveness-centered business model innovation. Specifically, business model innovations that provided the most effective (though not necessarily the most efficient or novel) solutions to cater to changing customer preferences were the winners in helping latecomers achieve catch-up.

Keywords:

• Catch-up
• business model innovations
• mobile handsets
• demand-side dynamics
• China

Notes

1. The concept of ‘windows of opportunity’ was first introduced by Perez and Soete (1988) in their research on the role of the onset of a new technological paradigm in latecomers’ leapfrogging in technological capability.

2. Moore (1991) uses the terms innovators, early adopters, early majority, late majority and laggards, while Rogers (1995) uses technology enthusiasts, visionaries, pragmatists, conservatives and skeptics, to label different adopters according to their degrees of ‘innovativeness’ in their adoption behavior.

3. Until 2009 when the smartphone, represented by Apple, became the mainstay of customer choice for mobile handsets, between 1998 and 2008 the technological environment for functional mobile handsets was relatively stable on 2G networks in China.

4. For reasons of confidentiality, we do not disclose the names of the interviewees. However, their titles and affiliations are available upon request.

5. The interview protocol is available upon request.

6. Production licensing is a policy instrument that has been used to protect indigenous Chinese industries. In the mobile handset industry, the licenses were initially granted to joint ventures, and then extended to indigenous firms. The licenses were not available to wholly-owned subsidiaries of multinational firms that wished to manufacture mobile handsets in China.

7. In 2002, CECW acquired Lemans, the world’s largest mobile handset R&D facility, which was owned by electronics giant Philips. This became a milestone for CECW. After the acquisition, CECW became China’s largest independent design house for handsets. In 2004 alone, CECW designed 22 mobile phones, and the number of handsets based on its designs and manufactured by indigenous firms reached seven million.