heh Mirroring and Disruption - A Case Study of Nokia’s Decline Master of Science Thesis in the Management and Economics of Innovation Program CARL-JOHAN BLOMQVIST DAÐI SNÆR SKÚLASON MAGNUS SJÖLANDER Department of Technology Management and Economics Division of Innovation Engineering and Management CHALMERS UNIVERSITY OF TECHNOLOGY Göteborg, Sweden, 2014 Report No. E 2014:008 MASTER’S THESIS E 2014:008 Mirroring and Disruption A Case Study of Nokia’s Decline CARL-JOHAN BLOMQVIST DAÐI SNÆR SKÚLASON MAGNUS SJÖLANDER Supervisor: Christian Sandström, Ph.D. Department of Technology Management and Economics Division of Innovation Engineering and Management CHALMERS UNIVERSITY OF TECHNOLOGY Göteborg, Sweden 2014 MIRRORING AND DISRUPTION Carl-Johan Blomqvist Daði Snær Skúlason Magnus Sjölander © CARL-JOHAN BLOMQVIST, DAÐI SNÆR SKÚLASON & MAGNUS SJÖLANDER, 2014 Master’s Thesis E 2014: 008 Department of Technology Management and Economics Division of Innovation Engineering and Management Chalmers University of Technology SE-412 96 Göteborg, Sweden Telephone: + 46 (0)31-772 1000 Chalmers Reproservice Göteborg, Sweden 2014 Abstract The mobile industry is an ever changing and fast growing technology based industry that is very interesting to examine at this point in time due to the technological shift the industry has gone through in the recent years. This technological shift has caused a disruption in the industry and led to the demise of many incumbents as new firms entered the industry. We argue that the shift the mobile industry has gone through is not merely a technological one, but rather a paradigm shift from the old feature phone paradigm to the new smartphone paradigm. Further, this paradigm shift brings substantial changes; where the institutions and underlying logic as well as those competences and business models that are important differ between the two paradigms. Nokia, the Finnish mobile device manufacturer, is one of the incumbent firms that have lost out during this shift. The company maintained a market leading position until the middle of the first decade of the 21st century when its market share started to drop rapidly, especially in the high-end, smartphone segment of the market. Despite its once strong position, Nokia lost out to new entrants. In this report we examine Nokia’s case and try to unveil the most important factors behind the demise of this technology giant. In order to do so, a case study of Nokia’s development between 2003-2010 was conducted, where extensive empirical data was collected through interviews with former Nokia employees and industry specialists, as well as by utilizing extensive secondary data. To analyze the data collected and help explain Nokia’s case, a theoretical framework is constructed using existing theory. Theory from various research streams is used, including theory on the evolution of industries; industrial transformation, including disruptive innovation and resource dependency; an organization’s cognitive abilities and its abilities to change, including concepts such as dynamic capabilities and dualism; as well as ecosystems and networks, where concepts such as network effects, two-sided markets and institutions become important. We will argue that a hierarchy of factors contributed to Nokia’s downfall, but that the underlying and most important issue was the firm’s inability to understand and adapt to the new smartphone paradigm and the underlying changes it caused in the industry; namely, changes in what institutional logics were applicable. In the new smartphone paradigm, software as well as platform logic and the corresponding mechanisms of two-sided markets, were much more important. This new emphasis and focus in the smartphone paradigm was fundamentally different from that of the feature phone paradigm, upon which Nokia had built its strong competence of hardware development. We propose this as following naturally by an enlarged perspective on the mirroring hypothesis, which we argue can be used to better explain incumbents’, such as Nokia’s, path dependence along an industry. This opens up for new suggestions on how the incumbent’s curse can be viewed. Further research should investigate the suggestions made in this report and elaborate on the implications of this new perspective. Acknowledgements This master’s thesis research project was conducted during the fall of 2013 as part of the master’s program Management of Economics of Innovation. The research was conducted at the Department of Technology Management and Economics at Chalmers University of Technology in Gothenburg, Sweden. First of all we would like to express our gratitude to our supervisor, Christian Sandström, Ph.D., who encouraged us to pursue this thesis project and whose support, advice and consulting have proved invaluable in the process of this research project. Furthermore, we would like to thank Henrik Berglund, Associate Professor at Chalmers University of Technology, who provided valuable input to the ongoing discussion of this thesis. We would also like to thank all the respondents that agreed to take part in this research project. Without their input and extensive knowledge on both Nokia and the mobile industry in general, conducting this research project would not have been possible. The time these respondents have put into our research and their help in getting us in contact with further respondents has therefore been extremely valuable for us through the progress of this study. Gothenburg, Sweden – February 8, 2014 …………………………………….………… Carl-Johan Blomqvist …………………………………….………… Daði Snær Skúlason …………………………………….………… Magnus Sjölander Table of Contents 1. Introduction ......................................................................................................... 1 1.1. Purpose ..................................................................................................................... 2 1.2. Scope and delimitations ........................................................................................... 2 1.3. Report Structure ...................................................................................................... 2 2. Method ................................................................................................................. 3 2.1. Research Strategy and Design ................................................................................ 3 2.2. Research Method and Data Collection .................................................................. 3 2.2.1. Primary Data ...................................................................................................... 4 2.2.2. Secondary Data .................................................................................................. 4 2.3. Research Process ...................................................................................................... 5 2.4. Validity and Reliability ........................................................................................... 5 2.4.1. Construct Validity .............................................................................................. 6 2.4.2. Internal Validity ................................................................................................. 6 2.4.3. External Validity ................................................................................................ 7 2.4.4. Reliability ........................................................................................................... 7 3. A Theoretical Framework on The Incumbent’s Curse ................................... 9 3.1. The Evolution of Industries .................................................................................... 9 3.1.1. Patterns of Innovation ........................................................................................ 9 3.1.2. Shifts and Discontinuities in Industry Evolution ............................................. 10 3.2. An Internal Perspective ......................................................................................... 12 3.2.1. Inherent Inertia and Path Dependency of Organizations ................................. 12 3.2.2. The Mirroring Hypothesis ................................................................................ 13 3.2.3. Coordination versus Cooperation ..................................................................... 13 3.2.4. Dynamic Capabilities - How Firms cope with Change .................................... 14 3.2.5. Breaking through the Cognitive Frame through Learning ............................... 15 3.2.6. The Difficulties of Decision Making in Organizations .................................... 17 3.2.7. Dualism and Matrix Organizations .................................................................. 18 3.2.8. Entrepreneurship inside existing Profitable Organizations .............................. 19 3.3. An External and Integrated Perspective ............................................................. 21 3.3.1. Innovation and Value Networks ....................................................................... 21 3.3.2. Effects and Risks of Innovation Networks ....................................................... 23 3.3.3. Managing Innovation in Networks ................................................................... 24 3.3.4. Network Forms and Institutions Role in Innovation ........................................ 25 3.3.5. Resource Dependency of Incumbent Firms ..................................................... 26 3.3.6. Business Model Innovation