FALL 2013 VOL.55 NO.1 Strategic Choices in Converging Industries By Fredrik Hacklin, Boris Battistini and Georg von Krogh REPRINT NUMBER 55116 STRATEGY Companies such as Apple, Google and Samsung have increasingly dominated the smartphone market and appear to be shaping its future. Strategic Choices in Converging Industries As industries converge and seemingly unrelated businesses suddenly become rivals, managers must understand the new THE LEADING challenges and the long-term implications. QUESTION BY FREDRIK HACKLIN, BORIS BATTISTINI AND GEORG VON KROGH How can companies protect them- selves when industries IN THE RELENTLESS EVOLUTION of technology and markets, many industries are in the converge? midst of, or are approaching, major reconfigurations of their fundamental architectures and the FINDINGS 1 way companies capture value. The changes are well underway in biopharma, nutrition products, Understand the factors driving health care and energy, where technologies and distinct knowledge bases are changing and converg- convergence. ing. Perhaps the most dramatic example of such convergence is taking place in the booming space Select your strategic of telecommunications, information technology, media and entertainment, which many people path: technology pioneer, market now refer to as a single field, the “TIME” industries.2 The TIME industries are characterized not attacker, ecosystem aggregator or only by the variety of new technological products and services being launched at an ever-increasing business remodeler. pace but also by the surging complexity of their markets and how companies win. As some compa- Strategic choices nies have expanded their scope, others have been forced to rethink and retool their strategies. in converging industries are not In many ways, the TIME example offers a useful model for managers in other industries where etched in stone. COURTESY OF GOOGLE, APPLE, SAMSUNG FALL 2013 MIT SLOAN MANAGEMENT REVIEW 65 STRATEGY convergence is less obvious. (See “Is Convergence new way to design the user interface — beginning Happening in Your Industry?”) with Apple’s iOS, followed by Google’s Android — The amount of change that the telecommunica- everything else became outdated. Consumers tions and related industries have seen in recent years preferred ecosystems based on market-driven has been extraordinary. Back in 2001, then-Nokia “apps” over services designed by the telecom carriers. chairman Jorma Ollila said that “the mobile Internet Players such as Nokia were caught in the changing should remain ‘under the control of the mobile in- current. In September 2013, Microsoft announced dustry, and not the computer makers.’”3 But that that it will acquire Nokia’s devices and services vision disintegrated when Internet browsing became business. mobile. Ericsson and Siemens, once market leaders, Unfortunately, as Nokia and many other com- have disappeared from the mobile handset market. panies have learned, turning a blind eye as the Other companies, such as Apple, Google and Sam- industry environment begins to change can be a sung, have increasingly dominated the smartphone costly strategy. Managers need to recognize the dif- marketplace and appear to be shaping the future. ferent drivers and the types of strategic choices that (See “A Changing Landscape in Mobile Handsets.”) are available to them. Depending on what you pro- While the changes have opened up new business vide and your position in the new landscape, the opportunities for some companies, they have opportunities and challenges will be different. proved harmful to others. For example, Nokia’s Beyond the development of novel end-user de- brand has suffered, while BlackBerry is struggling vices, infrastructures and services, convergence in to compete against the technical and financial the TIME industries has set in motion reorganiza- power of giants such as Apple and Google. Despite tion and realignment of business functions across its early promise, AOL Time Warner was not able to the entire value chain. Whereas traditional “land- leverage the expected synergies at the intersection line” carriers were once the only providers of of Internet and media content. telephony services, today you can purchase voice With convergence, companies that were in seem- and data services from an array of IP-telephony ingly unrelated businesses can become rivals. Indeed, providers. Convergence has put established prod- the day the mobile phone industry seized upon a ucts and services at risk, forcing old-line companies to search for new ways to survive.4 IS CONVERGENCE HAPPENING IN YOUR INDUSTRY? Convergence significantly affects the evolution Convergence is happening throughout the economy. Several emerging convergence of industry sectors and severely disrupts a compa- trends are giving rise to similar phenomena in different industrial sectors.i ny’s capabilities.5 Managers can observe the weak signals of convergence by analyzing patent data, scientific publications and classification schemes.6 Big “Functional Nutrition For example, they can see how Standard Industrial pharma foods” Classification codes and patent filings overlap by monitoring scientific publications.7 However, it’s useful to have a framework for identifying strategic priorities and plotting operational responses. • Consider, for instance, the developments around “functional foods,” where the nutrition Based on a six-year study on convergence in the industry and big pharma are increasingly moving onto the same battlefield. technology, information, media and entertainment • When looking at different products, such as probiotic yogurts, omega-3 bread, vitamin- sectors and its implications for the key industry boosted cereals, juices or dietary supplements, it is not always obvious if the product is a food or drug. participants, we have developed a framework that • The industry landscape starts changing accordingly. For example, Nestlé recently identifies four strategic pathways possible for com- acquired Pfizer’s baby nutrition business. panies facing industry convergence. (See “About the Research,” p. 68.) We describe strategies compa- Other examples: nies have used and show how these strategies need •Biopharmaceuticals •E-health •Nano-chemistry •Human-cyborg relations to take into account the long-term implications of •Smart grids convergence in order to help companies sustain 66 MIT SLOAN MANAGEMENT REVIEW FALL 2013 SLOANREVIEW.MIT.EDU growth. We have also identified four important A CHANGING LANDSCAPE drivers of industry convergence: technological ad- IN MOBILE HANDSETS Industry convergence has brought an extraordinary amount vancement, open architectures and standards, of change to the telecommunications industry in recent policy and regulatory reforms, and changes in cus- years. The effects of this change can be seen in the mobile tomer expectations and preferences. (See “The handset market. Drivers of Convergence,” p. 69.) Five Largest Mobile Handset Manufacturers Worldwide* Four Strategic Pathways 2000 2012 Companies have used four basic strategies to pre- 1. Nokia Samsung serve and capture value during convergence: 2. Motorola Nokia technology pioneer, market attacker, ecosystem ag- 3. Ericsson Apple gregator and business remodeler. We will explore 4. Siemens ZTE these pathways here. (See “Guiding Principles for 5. Panasonic LG Electronics Implementing Convergence Strategies,” p. 72.) *Based on quarterly sales figures (total units sold). The Technology Pioneer Technology pioneers SOURCE: GARTNER DATAQUEST (2010, 2012). provide superior technological solutions that pro- actively contribute to the advancement of They become the technology of choice. Technol- convergence between industries. They enter the ogy pioneers need to become well recognized for market early and make strategic choices about the their leadership, thus making it more difficult for appropriate technological specialization as well as downstream players to promote substitute products. the control of intellectual property. Mountain View, California-based Thin Multimedia, New ventures following this path recognize that which pioneered multimedia content delivery they need to demonstrate the technological poten- through new transmission technologies for wireless tial of their inventions and evaluate the conditions devices and TV sets, offers a good example. Although for early customer adoption. Consider video and confident in the technological superiority of their data delivery provider Round Box, of Florham offering, the founders worried that mobile handset Park, New Jersey, which developed a novel way to vendors would enter this space and block other ven- stream video over mobile networks. The founders dors’ entry. Technology pioneers are in a favorable saw their venture as a “mobile broadcast conver- position to work with a variety of equipment manu- gence company,” with a technological solution for facturers and service providers simultaneously and optimizing TV streaming to mobile phones. They can present themselves as independent. already had a prototype. The challenges — and this They negotiate nonexclusive licenses. Technol- is common among technology pioneers — were ogy pioneers avoid locking themselves into exclusive getting large carriers and network providers to em- agreements. A more effective approach is to pursue brace their technology and protecting their multiple licensing agreements, as Kineto Wireless intellectual property. Successful technology pio- has done, thereby increasing the odds that their tech-