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Optimizing open innovation

With Nokia as case

Aarhus School of BusinessAarhus University

March 2012

Department of Management and Statistics

Author: Lars Rasmussen

Academic supervisor: Martin Kloyer


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NOKIA and open innovation

Contents

Abstract ............................................................................................................................. 1

1. Introduction................................................................................................................. 2

1.1 Problem statement ................................................................................................... 3

1.2 Methodology............................................................................................................. 3

1.3 Scope and delimitation ............................................................................................. 5

1.4 Structure of the thesis............................................................................................... 6

2. The smartphone industry ............................................................................................ 7

2.1 Description of smartphone vendors .......................................................................... 7

2.1.1 Nokia ................................................................................................................. 7

2.1.2 Apple ................................................................................................................. 9

2.1.3 Samsung ......................................................................................................... 10

2.2 The integrated portfolio........................................................................................... 11

2.2.1 The market portfolio ......................................................................................... 11

2.2.2 The technology portfolio................................................................................... 13

2.2.3 The evolution of the integrated portfolio ........................................................... 20

3. Open innovation the theory.................................................................................... 21

4. The companies innovation processes ...................................................................... 28

4.1 Apples innovation processes ................................................................................. 28

4.1.1 Apples internal innovation process.................................................................. 28

4.1.2 Apples use of open innovation ........................................................................ 30

4.1.3 Assessment of Apples innovation processes................................................... 31

4.2 Samsungs innovation processes ........................................................................... 34

4.2.1 Samsungs internal innovation process ............................................................ 34

4.2.2. Samsungs use of open innovation.................................................................. 36

4.2.3 Assessment of Samsungs innovation processes............................................. 37

4.3 Nokias innovation processes ................................................................................. 40

4.3.1. Nokias internal innovation processes ............................................................. 40

4.3.2 Nokias use of open innovation ........................................................................ 43

4.3.3. Assessment of Nokias innovation processes.................................................. 48

4.4 Partial conclusion ................................................................................................... 51

5. Discussion - Where have Nokia failed?..................................................................... 53


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6. Conclusion and further research ............................................................................... 59

6.1 Conclusion ............................................................................................................. 59

6.2 Suggestions for further research ............................................................................ 61

Bibliography..................................................................................................................... 62

Books........................................................................................................................... 62

Articles/slides ............................................................................................................... 62

Internet sources ........................................................................................................... 63

Appendix A A short description of OS suppliers ............................................................ 72

Appendix B Mobile phone and smartphone market shares ........................................... 74

Appendix C Specifications for smartphones.................................................................. 76

Appendix D Apples hardware suppliers:....................................................................... 77

FiguresFigure 1: structure of thesis ........................................................................................ 6

Figure 2: The three companies in the integrated portfolio ......................................... 20

Figure 3: The open innovation paradigm for managing industrial R&D...................... 21

Figure 4: The Want, Find, Get, Manage Model ......................................................... 24

Figure 5: Apples innovation processes..................................................................... 33

Figure 6: Samsungs innovation processes............................................................... 39

Figure 7: Nokias innovation processes..................................................................... 50

TablesTable 1: Review of the three smartphones................................................................ 15

Table 2: Companies use of OI tools ......................................................................... 51

Table 3: Companies in the Want, Find, Get, Manage model................................... 52

Table 4: Some of the differences between Nokia and Apple..................................... 53

Table 5: Worldwide smartphone sales to end users by operating system in 2010

(thousands of units) .................................................................................................. 73

Table 6: Worldwide mobile device sales to end users in 2010 (thousands of units) .. 74Table 7: Global smartphone vendor market share (millions of units) ......................... 74

Table 8: Smartphone market shares 2008 and 2009 ................................................ 75

Table 9: Worldwide mobile communications device open OS sales to end users by OS

(thousands of units) .................................................................................................. 75

Table 10: Specifications for the three competitors best smartphone......................... 76


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Abstract

This paper is about the former industry leader within the smartphone industry, Nokia

against the two current industry leaders, Samsung and Apple. Open innovation is a

necessity for the participants within the smartphone industry since many technologies

need to be mastered. But the focus is not only on open innovation since the paper also

assesses other strategies within customer focus, marketing strategy and their own R&D

strategy. These parts have a direct or indirect effect on the companies use of open

innovation. Secondary sources are used to evaluate how the companies innovate.

Slowinskis Want-Find-Get-Manage approach for managing open innovation is used to

assess Nokias innovation strategies which are compared to its two main competitors

innovation strategies. The model shows where Nokia might have failed and it is primarily

within the want-/goal part. The market and technology leader, Apple know what they want

and how to reach those goals. Their strategies have created the most efficient money

generating machine within the smartphone industry. Nokia want to serve a lot of segments

and they also wanted to have their own OS, the Symbian, which was inadequate. Nokia

primarily focus on cost, but they also want to provide proper hardware, good design and

serve all segments, which includes the feature phone- and the emerging markets. They

are the ones who use the most open innovation tools and have also spent the most on

R&D. Nokias situation has, however, improved after they started to cooperate with

Microsoft and abandoned their own OSs. They created the new Lumia-line together which

has made the two companies a new serious contender within the smartphone industry.

It is assessed that Nokia have several opportunities to improve their situation. Nokia have

rejected potentially good ideas since the managers could not assess the ideas properly or

were too focused on cost. It is advised that they start to focus on value first and focus on

cost when value has been proven. It is also advised that they leave the feature phone

market since it is a low profit area with tough competition. Nokia should focus their R&D

and their use of open innovation within the smartphone market. They should then make a

super smartphone line which is the most profitable area. The super smartphone strategyhas some specific requirements and the Lumia-line has already breached some of those

requirements. Their narrower focus can improve Nokias R&D figures and their use of

open innovation. Suggestions for further improvement of their use of open innovation are

although not within the scope of this thesis since the goal analysis is the main analysis

area. Nokias open innovation opportunities have been mentioned in the further research.


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1. Introduction

Nokia have enjoyed being the market leader within mobile phone industry for a long time.

The long period of industry leadership is impressive when considering how volatile themobile phone industry is. However, during the last decade a new product emerged, the

smartphone,1 which eventually shook Nokias world. Nokia were able to dominate the

smartphone industry at first and enjoyed large market shares. But their situation changed

as new competitors from the Internet service- and personal computing industries became

a part of the smartphone industry. These new competitors had been industry leaders

within their former industry and they had different core competencies and strategies,2

compared to the traditional mobile phone companies. Nokia, nonetheless, felt ready for the

new smartphone challenge as they were proud of their ability to change.

3

Nokia continuedto dominate the smartphone industry when Apple entered the industry in 2007 and later in

2008 when Google entered. But the different competencies and strategies made it difficult

for Nokia to maintain their position and they were losing market shares every year. They

were finally passed by Apple and Samsung, a competitor who uses Googles Android, in

the second quarter of 2011. This is a critical situation for Nokia as the smartphone is the

most lucrative product compared to the traditional mobile phone market, the feature

phone.

The very volatile market and the need for different core competencies are good argumentsfor using open innovation. Open innovation is about having an open approach towards

ideas and technologies to improve and speed up the R&D processes. Open innovation will

be explained further in the theory section. Nokia have although practiced open innovation

since the mobile industry, according to Nokia, have: escalating R&D expenditures,

ever-shorter product life cycles, rising entry barriers, increasing needs for global

economies of scale and, particularly in technology-intensive industries, the growing

importance of global standards.4 Nokia thought that they were ready for the new

challenges and were aware of the opportunities that open innovation gave. But Nokia still

lost their market shares within the smartphone industry after a good start and this leads to

the following problem statement:

1A smartphone is a combination between phone and a small handheld computer2 Kenney et al (2011), page 2403 Steinbock (2010), page 2304 Steinbock (2010), page 192


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1.1 Problem statement

The optimal use of open innovation should lead to faster speed to market, cheaper and

more efficient R&D. Something has although gone wrong for Nokia since they have

abandoned their own software solutions due to slow development and their R&D expenses

are higher than their competitors. This leads to the following problem statement:

Can Nokia optimize their use of open innovation to regain the industry leadership within

the smartphone market?

In order to explore Nokias use of open innovation within the smartphone industry, I have

developed the following research questions:

Where are Nokia placed in the integrated portfolio compared to the two industry

leaders, Apple and Samsung?

Which innovation processes do the two industry leaders use?

Why did Nokia lose their market shares within the smartphone industry when they

use open innovation?

1.2 Methodology

This is a practical oriented thesis rather than a theoretical thesis. There is not much theory

and only few theories have been included. The thesis includes two models, which are the

The Integrated Portfolio and the Want-Find-Get-Manage-model. The integrated portfolio

gives a current position of the competitors through the market portfolio and a long term

position through the technological portfolio. The model will be used to find the industry

leader and the two followers. Their position will also affect how the followers should act to

gain on the industry leader.

The other model is called the Want-Find-Get-Manage model which is about how to

optimize the use of open innovation. The model will be further described in the theory

section. The model was an eye-opener since it is able to categorize the different stages of

open innovation and it clarifies where Nokia can have failed. It has been a struggle to find

alternative models for how to optimize the use of open innovation. There exist a lot of texts

about why to adapt open innovation, but not many about managing open innovation.

However, the thesis is not going to be an assignment about why Nokia and the companies

should use open innovation since they all use open innovation to some degree.


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The thesis primarily uses secondary sources since contacting the three companies would

have required a lot of basic knowledge. A user survey was also an opportunity within the

technology portfolio as respondents could assess the different parts of each companys

smartphones. The survey would assess the companies best smartphone models. Apple

have started this best smartphone5 competition and Samsung have followed by

introducing the Samsung Galaxy S-line. The user survey could give satisfying results for

the iPhone 4S and Samsung Galaxy II, as those two have plenty of users. But there would

only be very few respondents for Nokias new smartphone and such a survey would not

have given reliable results for all three models.

The secondary sources used for this thesis are primarily articles and blogs from the

smartphone world. The secondary sources are potential victims for bias and this has been

the case for the smartphone industry. The different newspapers, bloggers or homepages

have in many cases a favorite amongst the different hardware or the software suppliers.Many of these sources almost have a religious approach to how they assess the different

smartphone solutions. There are lots of Phandroids (Android fans) or Apple-holics out

there as some prefer the more free approach which Android offers, while others prefer

Apples ease of use. There are currently not many Nokia- or Microsoft fans out there, but

this might change after the introduction of Nokias new and improved product line.

The bias has created several problems during the thesis period. When the integrated

portfolio was written, it was possible to find different technological winners through

different homepages. Apple were winners in most of the homepages, while Samsung alsowere a winner once in a while. It was not possible to find Nokia as winner, but a lot of

homepages agreed that Nokia had come closer to the two industry leaders with the

introduction of their newest smartphone, Lumia 800. Potential bias was checked by

searching the authors background whenever certain words or sentences were too

positively or negatively loaded. By seeing the authors other texts or background, I usually

got an answer about his or her religion and knew that it might be biased information. The

bias problem was solved by having multiple sources about the biased information to find a

more sophisticated view of the situation.One of the main sources for this thesis is the Nokia book: Winning across global markets:

How Nokia creates strategic advantage in a fast-changing world. This was a book written

as Nokia were losing their smartphone market shares, but the book was still very optimistic

and described Nokia positively. The whole book only has three sentences in the end of the

5 These best smartphones will be termed as super smartphones in the rest of the thesis.


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book where Nokia acknowledged that Apple was a serious threat. The book is clearly

written for Nokia since it only mentions Nokia in positive terms. However, the bias was

apparent since Nokia had gone through and are still fighting a crisis period where things

become more obvious. The book is relevant for this thesis as it mention a lot about Nokias

internal processes and their use of open innovation.

1.3 Scope and delimitation

The thesis will primarily focus on smartphone vendors, which include hardware

manufacturers and developers, since Nokia is the main story. It will also include the two

industry leaders, Apple and Samsung, as they will be the ones for Nokia to capture. The

software part is, however, the main differentiator within the smartphone market,6 and it is

not possible to exclude the software part totally. The intention was originally to include

software and hardware competitors, but the thesis would have been too chaotic and theanalysis would have been too superficial if both parts were included equally.

Some companies are more interesting than other and this has also characterized the

smartphone market. It has been easy to find articles and reports about Apples success

and Nokias former success. A lot of these articles are although often superficial as they

conclude that the companies have success, but they usually do not reflect about how they

got into that position. But it has been a challenge to find information about Samsungs

success on the smartphone market and their innovation processes. A lot of time has been

spent on searching for information that was available for Apple and Nokia, but the sameinformation was not available for Samsung. Samsung have a lot of other business areas

and finding the right search term has been a challenge. After many hours of wasted search

I had to draw a line. This means that the written parts about Apple and Nokia are more

detailed while the parts about Samsung are less detailed.

I found some market research reports about the smartphone industry and one of them was

made by Research and Market. However, their electronic report cost 3,495, which most

of the smartphone reports cost. Access to the report would have been a time saver, but

information about the smartphone industry is very valuable. This may also mean that thegathered information is sometimes superficial, but without access to the industry reports

the collected sources will have to do.

The market portfolio was written in October 2011 and the market shares are for the second

quarter of 2011. This chapter has not changed even though newer markets shares have

6 Garner (2010)


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come up. The two next quarters are also distorted by customers waiting for the next

iPhone, creating low figures in the third quarter for Apple, while Apples sales figures

exploded in the next quarter. The rest of the thesis will use the newest, available sources.

1.4 Structure of the thesis

Figure 1: structure of thesis

The introduction is about how Nokia are user of open

innovation and still managed to lose market shares within

the smartphone market. The problems statement is about

whether Nokia can optimize their use of open innovation to

regain their lost smartphone market shares? The starting

point includes the integrated portfolio, which give a picture

of where the competitors are today and where they are

headed. The next part is about the open innovation

theories which first describes the general open innovation

theories and then include the Want-Find-Get-Manage

model. The model is used as a detection tool for where

Nokia have failed. Following that is a description of the two

industry leaders innovation processes, which includes

both internal innovation processes and their use of open

innovation tools, to compare them to Nokia innovation

processes. The comparison of their innovation processes

will possibly show where Nokia failed. This leads to

recommendations for how Nokia can overcome these

problems to improve their market shares. The last part is

the conclusion and further research. The conclusion will

answer the three research question and the problem

statement to sum up the findings. The further research will

come with suggestions within this topic, Nokia and open

innovation.

Source: Own figure


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2. The smartphone industry

The smartphone industry is characterized by having quite a diverse set of players. There

are hardware developers, software developers, apps developers, manufacturers,

companies who only license their patents, carriers, old players, newcomers and many

others. Some companies are active within most areas while others only focus on a single

or few areas. As mentioned in the delimitation, the thesis will primarily focus on the

smartphone vendors. A short description of the operating systems (OS) providers can be

seen in appendix A. The next section will be a short description of the three chosen

smartphone vendors in the smartphone industry.

2.1 Description of smartphone vendors

The first company to be described is the main company in this thesis, Nokia, and will be

followed by the two industry leaders, Apple and Samsung:

2.1.1 Nokia

History and background: Nokia are one of the traditional players and they were the

industry leader in the total mobile phone industry in 2010 which can be observed in table 6

appendix B. Nokia started as a company in 1865 and have been a forestry-, a rubber-, a

cable-, an electronics- and a mobile phone company during its lifetime.7 Nokia began to

experiment with telecom equipment during the 60s, but the first many years were not

successful.8 Their mobile phone business became a success when present chairman of

the board, Jorma Ollila, started as CEO in January 1992. Nokia sold a lot of business

divisions and began to focus on mobile phones.9 Nokia and Ericsson were pioneers within

GSM and when the European countries chose GSM as standard, the two companies got a

good start within the mobile phone industry.10 Ollila has been a huge contributor for

Nokias overall success since Nokia went from $3.5 billion in revenues by 1992 to $54.3

billion when he retired as CEO in 2006. The number of employees also more than doubled

during that period, since Nokia went from having 27,000 to 68,000 employees.11

7 Steinbock (2010), page 1-28 Steinbock (2010), page 114-1159 Steinbock (2010), page 3010 Steinbock (2010), page 3211 Steinbock (2010), page 34


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Nokia were well aware of the convergence between the Internet and mobile phones. In

1998 they joined up with Ericsson, Motorola and Psion to develop Symbian, 12 since they

realized that the future competition would be within software.13 Nokia would rather

compete within the hardware part, which is one of Nokias main forces and wanted to

neutralize the software competition by developing a common software base. 14 In 2002

Nokia began to focus even more on the smartphone business and invested intensely

because of pressure from Microsoft.15 Nokia got a good start within the smartphones

market, but their success did not last as their dominance was shrinking. In 2010 Samsung

and Sony Ericsson were the last to leave Symbian in favor of Android.16 Nokia reacted by

hiring the former head of Microsofts business division, Stephen Elop, as their new CEO by

September 2010. Elop quickly realized that Nokia could not deliver the same experience

as Apple or Android and he knew that something radical had to happen. 17 By February 11th

2011 Stephen Elop announced that Nokia were going to cooperate with their formercompetitor, Microsoft to adopt Windows Phone 7.5 (WP7.5) and that their own smartphone

OSs, Symbian and Meego, would be phased out.

Business model: Nokia differentiate themselves by being a manufacturer of the

smartphones compared to the new smartphone competitors.18 Nokia claim that

manufacturing is one of their main competences and this will be further described in the

section about their innovation processes. Nokia have prioritized cost since they are aware

of decreasing prices during a products life cycle.19 This means that they primarily earn

their money by selling their own produced smartphone with Microsofts OS installed.Number employees: Nokia had over 132,000 employees by mid 2011,20 and Nokia had

manufacturing employees. By 2010 Nokia had 17,200 R&D employees,21 but Nokia have

fired several R&D employees after they started the collaboration with Microsoft to make

their R&D department more efficient.

12 Kenney et al (2011), page 246-713 Steinbock (2010), page 12614 Kenney et al (2011), page 24715 Steinbock (2010), page 12616 Dalziel (2010)17 BBC Mobile (2011)18 Kenney et al (2011), page 25519 Steinbock (2010), page 23220 CNN Money (2011)21 Dediu I (2011)


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2.1.2 Apple

History and background: Apple are a newcomer within the mobile industry and they

have a background from the computing industry. Apple introduced a MP3 music player,

the iPod, during the first years of the last decade which became a huge success. Apple

were forced to join the smartphone industry, since there was a convergence betweenmobile phones, Blackberries and MP3 players. Apple wanted to protect their iPod

revenues. They tried to cooperate with Motorola to create a common phone in 2004, but

the cooperation was a failure since Motorola could not come up with a successor after

their blockbuster, RAZR. Apple realized in 2005 that they had to make their own mobile

phone. It was a struggle to find their first smartphone OS since making a smaller version of

their Macintosh OS, their laptop OS, seemed too difficult. Apple then considered Linux, but

Steve Jobs would not use anothers OS. This meant that they scaled down their Macintosh

OS to make their smartphone OS.22

Apple introduced their f irst iPhone in June 2007 andthe first iPhone was unique with its touch screen, minimal hardware and its advanced

features.23 The first iPhone created a revolution within the smartphone industry as it

disrupted the previous smartphone models.

Business model:Apple sell their own mobile phone; they have their own OS with a lot of

complementary apps and have online stores. They sell complementary products which will

be mentioned in their innovation processes. Apple have only used their own OS during the

iPhones existence. In the smartphone industry Apple primarily earn their money by selling

smartphones and by selling music, videos or apps through iTunes or App store. ApplesiTunes model for searching for, selling and listening to the music is simple and easy to

use. Apple negotiated contracts with all the major record companies and have created the

largest online music store.24 Apple sell smartphones in the high-end of the mobile phone

industry, but they also sell their former models cheaper when new models are introduced.

Apples entrance to the smartphone market has surprised the traditional players of the

mobile phone industry and Nokia have struggled to provide the same offerings since.25

Number of employees: Apple have 60,400 employees, but 36,000 of them are store

employees since Apple have 357 stores worldwide.26. This means that their organizational

structure is different from the two other competitors who also have manufacturing

22 Vogelstein (2008), page 1+323 Samra (2011)24 Osterwalder et al (2010), page 4725 Kenney et al (2011), page 24726 Camm-Jones (2011)


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employees. Apple have chosen to outsource their manufacturing since Apple cannot pay

industry standard wages without being criticized.27 It is estimated that Apple had 3,200

R&D employees for the iPhone.28

2.1.3 SamsungHistory and background: Samsung are also one of the traditional players within the

mobile phone industry and they released their first mobile phone in 1988.29 Samsung are

one of Nokias main competitors and the two companies compete in both the smartphone

market and the feature phone market. In 2010 Samsung sold 281.1 million mobile phones

compared to Nokias 461.3 million, making Samsung the second largest player within the

whole mobile phone industry see table 6 in Appendix B to see the total mobile phone

sales. Samsung did, however, not get the best start within the smartphone market as they

only shipped 5.5 million smartphones in 2009 which added up to a market share of 3.2

%.30 One of the reasons was that Samsung did not have the sufficient OS to become a

success within the smartphone industry. Samsung were, nonetheless, able to change their

strategy and have become one of the main players of the smartphone industry by

introducing smartphones that used Android and maintain their hardware advantages.31

Samsung gained a lot of market share by introducing the Samsung Galaxy S-line in June

2010,32 which is their main contender against Apples iPhone.

Business model: Samsung earn their money by selling mobile phones, but also by selling

spare parts. Samsung are, as one of the traditional players like Nokia, quite interested in

scale. They become specialist within certain parts and their goal is to sell those parts to as

many as possible. Samsung have a complex relationship to Apple since they are fierce

competitors fighting for the industry leadership in the smartphone industry. But Samsung

are also one of Apples key suppliers of flash memory, displays and processors. Apple

have become the single largest customer for Samsung as 4 % of Samsungs revenue in

2010 originated from Apple.33 Samsung use several smartphone OSs, but their main OS is

Android which will be elaborated in Samsungs innovation processes.

27 Evans I (2011)28 Dediu I (2011)29 Republic (2008)30 Team PI (2011)31 Kiju (2011)32 Tofel (2011)33 Evans II (2011)


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Number of employees: Samsung Electronics had over 190,000 employees by July

2011,34 but it is uncertain how many worked within the mobile phone business part since

Samsung Electronics have several business areas. They have an unrevealed number of

employees within the manufacturing, but Samsung have assessed that they had about

8,500 employees involved in mobile phones R&D.35

2.2 The integrated portfolio

The integrated portfolio, which consists of the market portfolio and the technological

portfolio, will compare Nokia against its two main competitors; Apple and Samsung. The

market portfolio is the current position of the competitors strength within the market. The

technological portfolio gives a long-term competitive position for each of the competitors.36

The two portfolios put together create the integrated portfolio and all three figures,

including the three competitors, are shown in the end of this chapter.

2.2.1 The market portfolio

The market portfolio consists of the market attractiveness, which will be the same for all

competitors even when the different segments have different attractiveness. The

competitive market strength will be assessed for each of the smartphone vendors. The

competitive strength will evaluate the competitors market- and profit share. Profitability is

usually considered to be correlated to the market share and therefore the emphasis is

usually on market share.37 The correlation between market share and profits within this

industry is non-existing and the profits will also be included.

Market attractiveness vertical axis

In 2010 the smartphone vendors sold 296 million smartphones compared to 172 million

smartphones in 2009 which is an increase of 72.1 %. The smartphone share compared to

the total mobile phone sales rose from 14.2 % in 2009 to 18.5 % in 2010. The smartphone

market will continue to grow with double digits forecast until 2015, but the growth will

decline according to Gartner38 which can be observed in table 9 - appendix B. Gartner

expects that the smartphone sales will pass 1 billion units by 2015 and account for 47 % of

34 CNN Money (2011)35 Levine et al (2011)36 Ernst et al (2003), page 54337 Ernst et al (2003), page 54338 Gartner is one of the world's leading information technology research and advisory company.


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the total mobile device market.39 The smartphone industry is also the most lucrative which

will be shown in Apples part within the competitive strength. There are still plenty of

opportunities for growth and smartphones will continue to be a very attractive market.

Gartners analysis shows that the smartphone growth will top this year which indicates that

the smartphone market is still in the growth phase and moving into the mature stage.

Competitive strength horizontal axis

Nokia were by far the biggest player on the smartphone market just some years ago.

Nokia had approximately half of the smartphone market in 2008, but the market shares fell

to 39 % in 2009 see table 8 in appendix B. Their decreasing market shares continued

during 2011 and Nokia were passed by Apple and Samsung in the second quarter of

2011. Nokia had 15.2 % of the smartphone market shares in the second quarter of 2011

and they were the third largest competitor within the smartphone market see table 7 inappendix B. Nokia had well over 50 % of the total profits in the second quarter of 2007

within the mobile industry, but Nokia actually lost money in the second quarter of 2011.40

Nokia have the lowest score in the second quarter of 2011 between the three hardware

producers when it comes to market share and profits share. Nokia are although close to

the two others competitors when it comes to market share, indicating a high score on the

horizontal axis of the market portfolio, but still well beneath the two industry leaders since

they had no profits.

Apple had 18.5 % of the smartphone market shares in the second quarter of 2011 see

table 7 in appendix B. Their sales increase rose by 141.7 % compared to the same quarter

2010. Apple became the market leader of the smartphone market in the second quarter of

2011. The difference between the competitors becomes more obvious when it comes to

profits: Apple only had 5.6 % of the total mobile phone market share in the second quarter

of 2011, but Apples share of total profits were 66.3 %.41Apple were able to dominate that

quarter with the older iPhone 4 model,42 which is impressive since the smartphone industry

is evolving fast.Apple have the highest score when it comes to market share and profits compared to its

competitors which give Apple the highest score on the horizontal axis.

39 Gartner (2011)40 Elmer-DeWitt (2011)41 Elmer-DeWitt (2011)42 Mohindru (2011)


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Samsung have experienced a lot of growth during the last couple of years. They only had

5 % of the smartphone market share in the second quarter of 2010 while they had 17.5 %

of the market share in the second quarter of 2011 see table 7 in appendix B. Samsung

grew by 519 % when it comes to number of sold smartphones. One of the main reasons

for their smartphone success was strong sales from the Samsung Galaxy S2.43 Samsung

have, to some degree adapted, Apples one super smartphone model per year, as the first

Samsung Galaxy S was introduced in June 2010, while Galaxy S2 was introduced in June

2011.44 The smartphones are also adapted for carriers different requests.

Both Nokia and Samsung have not been able to capitalize the smartphone market as well

as Apple. Samsung were, nonetheless, able to capture 15 % of the total profits,45 but this

number also includes profits from other smartphones and their feature phones.

Samsung have a high score when it comes to market share and profits since their market

share and profits are between Apple and Nokia. This also means that Samsung liesbetween Apple and Nokia on the horizontal axis of the market portfolio.

The companies position in the market portfolio is observable in the end of this chapter.

2.2.2 The technology portfolio

The technology portfolio consists of technology attractiveness and resource strength of

each of the companies. The technology attractiveness, the vertical axis, will be an

assessment of the external factors, such as acceptance, potential for advancement and

application scope. This will be the same for all three companies since this will be an

assessment of the companies super smartphone. The resource strength of each

company, the horizontal axis, will be an assessment of the internal factor, e.g. their level of

technology, their potentials and the strength of their patents.46

Technology attractiveness vertical axis

Acceptance: As more mobile phone users are switching to smartphones this indicates

that smartphones are generally accepted by the broader masses.

Technology life cycle (TLC): The attractiveness of the technology can be estimated by

the patent situation. But the measurement of the patent situation requires a complete

43 Tode (2011)44 Mobile Phones UK (2011)45 Elmer-DeWitt (2011)46 Kloyer (2011), page 51


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statistical survey of all patent applications within the technological field of the industry, 47

which is almost impossible due to the massive numbers of patents and applications within

the mobile phone industry. There will instead be an assessment of the overall patent

situation within the smartphone industry.

A patent war rages within the smartphone market and it is a battle to have the most

important patents. There has been an explosion in patent lawsuits since 2010.48 Android

experienced 37 patent disputes within a year,49 and Google are the one that many of the

big players are going for. This indicates that the technology is attractive for the individual

players. When a patent war ends companies usually prefers to cross license rather than

losing money in the courts,50 and this indicates the smartphone industry is still attractive.

Potential for advancement:Apple introduced a radical improvement of the smartphone in

2007 and the iPhone as the dominant design indicates that the time of radical product

innovation is over. This means that the smartphone industry is within the period ofincremental product innovation. There will be a continuing battle to have the best software

and have the optimal screen resolution, touch screen, camera and other hardware parts.

It is predicted that some of the main competition areas for hardware parts will be within

processors, connection to the Internet (4G) and cloud computing. Dual core processors

have been introduced by almost all companies and the next battle within processors is

about quad core processor. Quad core processors do need much better battery solutions

and this has created reluctance amongst the vendors.51

The emergence of 4G will give cloud computing and Internet surfing better circumstances.The users of smartphones have been constrained by the carriers when it comes to Internet

usage and speed. 4G will solve the demand for more data and improve the experience of

cloud computing. Cloud computing enables customers to see full length movies in HQ and

listen to music without taking hard disk space from the smartphones. 52 The right cloud

computing strategy is important since shifting from one cloud service provider to another is

complicated for the users. This can make a customer stay at their current cloud service

provider longer and make the customer stay longer at the same smartphone vendor.53

47 Haupt et al (2007), page 38848 Harrison (2011)49 Williams (2011)50 De La Merced (2011)51 Carson (2011)52 Garner et al (2011)53 Howley (2011)


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Place on vertical axis: The 4G, better processors and cloud computing indicates that the

smartphone market has not reached its full potential yet. More opportunities will emerge

when 4G and cloud computing becomes a fully integrated part of the smartphones. The

patent war also indicates that the technology is still attractive. It is assessed that the

smartphone technology is within the growth stage, but moving towards the mature stage

since many of the new incremental improvements have been invented and are about to be

implemented.

Resource strength

The first part within this section will be an external assessment between the three

competitors super smartphones as the super smartphone account for the most of their

smartphone revenues. Apple were, as mentioned earlier, the one who started the super

smartphone competition. Apples iPhone 4S is by far their largest smartphone revenuecontributor and Samsung Galaxy S2 is Samsungs biggest profit contributor. Nokias

newest smartphone and their current flagship, Lumia 800, will be compared to find out who

has the brightest future of the three companies. See Appendix C which shows the three

models specification. Table 1 is reviews made by The Verge who have assessed the

three models as following:

Table 1: Review of the three smartphones

Specs / Model Nokia Lumia 80054 Apple iPhone 4S55 Samsung Galaxy S256

Design 9 8 9

Display 9 10 8

Cameras 7 9 8

Reception/Call qual. 8 7 7

Performance 8 8 9

Software 8 9 7

Battery life 7 8 8

Ecosystem (apps) 6 10 8

Sum 62 69 64

Source: www.theverge.com

54 Savov (2011)55 Topolsky (2011)56 Ziegler (2011)
http://www.theverge.com/http://www.theverge.com/


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As mentioned in the methodology part, it was possible to find different winners. Nokia

Lumia have a high score in this review compared to other reviews, but almost all reviewers

think that Nokia have gone into the right direction by introducing the Lumia-line. The Verge

was chosen since this was one of the few reviews with several criteria and with

assessments of each part. Other reviews did not use the same criteria and it was not

possible to compare several reviews. Other reviews were simpler, since they assessed

that the iPhone 4S won over Galaxy S2 and Lumia 800 within a certain part. The Verges

reviews are also unweighted comparisons which do not give a correct picture of their

technological position as e.g. software is the most important part. It was not possible to

find a homepage which had reviews with several criteria evaluated and the same criteria

weighted. This will be mentioned as a part within the further research.

The following will be a review of the vendors abilities within hardware partly through table

1; by evaluating their patent situation and what their potentials are. After each competitorsevaluation there will be an assessment of the three companies place on the horizontal axis

of the technological portfolio.

Nokia

Product: Nokia have not installed 4G or dual core on their Lumia 800 which can be

observed in Appendix C. This is a bit critical since those two parts are mentioned as the

new competition areas within the hardware parts. The two other smartphone vendors have

dual core, but Nokia has been set back by the cooperation with Microsoft since WP7.5does not support dual core yet.57

Nokia are known for their design capabilities which are confirmed in table 1. A small

positive surprise is that Nokia in this review have better design capabilities than Apple.

Nokia are also known for their excellent hardware parts, but the review of camera and

battery life show a negative surprise as Nokia have received the lowest scores within

those two parts. Nokias cooperation with Microsoft has paid off as they have the second

highest score for software, but their ecosystem still lacks.

Patents: Nokia are one of the traditional players within the mobile phone industry and theyhave over 11,000 patents. They have successfully forced several of the major and newer

mobile producers to pay licenses for the use of Nokias patents.58 Nokia for example won a

57 Meritt (2011)58 Ogg (2011)


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lawsuit against Apple in June 2011 and Apple had to pay an undisclosed onetime payment

for the millions of iPhones they had sold since 2007 plus ongoing royalties.59

Potentials: Nokia had approximately R&D 17,200 employees before the cooperation with

Microsoft. Their number of R&D employees exceeds Apple by more than a fivefold. 60 The

agreement between Microsoft and Nokia has meant layoffs in Nokia and they hope for a

more efficient R&D department.

Nokia had $9 billion in cash reserve by July 2011. Their sales of smartphones have

continued to drop after the announcement of the collaboration between Nokia and

Microsoft. Nokia might have been forced to use some of its cash reserves,61 but their

situation may have improved after their launch of the Lumia-line.

Trajectory: Nokia have some of the best design in the industry and they have a solid

patent pool. Their cooperation with Microsoft is also an upside, but a surprise is that Nokia

are lacking within some of the hardware parts which are considered as some of Nokiasforces. Nokia have more R&D employees hired than Apple, but they have a much smaller

cash reserve than Apple. Their lacking dual core technology, inferior hardware parts,

lacking ecosystem and their questionable potentials are pulling Nokia down, but their

excellent design and their big pool of patents save them. Nokia are placed high, but still

beneath the two industry leaders.

Apple

Product: Apple are focusing more on user experience than implementing the newesttechnology,62 and this is well illustrated by the missing 4G on their iPhone. The current

solution for 4G requires two chips and Apple will wait for the one chip that has both

technologies installed. They introduced dual core on the iPhone 4S by October 2011.

There was some disappointments about the release of the iPhone 4S as a lot expected the

iPhone 5. But Apple were still able to beat all sales records since they sold 4 million

iPhone 4S during the first weekend.63Apple also introduced Siri when the iPhone 4S was

introduced, which is a voice assistant. It is only for the English speaking persons, but was

considered as a revolutionary app.64

Apples focus on user experience has paid off since

59 Informative report (2011)60 Dediu I (2011)61 ben-Aaron (2011)62 Ragnetti (2011)63 Reising (2011)64 Gartenberg (2011)


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they receive the highest total score amongst the three competitors which can be observed

in the reviews. The reviews show a surprise since Apple received the lowest score within

the design part which is considered as one of their forces. Apples iOS have the best

software and they also have the best ecosystem.

Patents:Apple have 4,000 patents,65 which is relatively few compared to its competitors.

Some of their patents are although important to the smartphone industry, e.g. the

touchscreen patent.66 The relatively few patents have not stopped Apple from litigating and

they are amongst the most aggressive to litigate. Apple have for example managed to get

a larger share of the $40 royalties for each smartphone HTC sell with Android installed. 67

Apple also won a lawsuit against Samsung and were banned from selling some of their

smartphone models in the Netherlands for a period.68Apple were, however, forced to pay

licenses to Nokia as mentioned earlier. Another lawsuit against Apple came from Samsung

who believe that Apple are infringing some of Samsung wireless patents.69

Potentials: Apple have an efficient R&D department compared to its competitors. Apple

only spent 2.5 % of their phone sales in 2010 to develop their iPhones. They only had

about 3,200 R&D employees in 2010 for the whole iPhone package which is significantly

fewer than their competitors.70 One questionable factor is if Apple can continue their

success after Steve Jobs death. Steve Jobs was the primus motor and an extreme

perfectionist. Has he successfully transferred his genes to Apple and his employees?

Apple have the largest cash reserves within the technological industry and are among the

cash reserve leaders in the whole business world. Apple had $81.6 billion in cash reservesafter the last fiscal year which ended at 24 September 2011.71

Trajectory:Apple do not always implement the newest technology into their products, but

their products are put together so well that it enhances the user experience. Apple have

received the highest total score within the reviews, but they received the lowest score

within the design part. Steve Jobs death is a questionable factor which may pull Apple in

the other direction. But their highest total score, their cash reserves and their efficient R&D

department place Apple close to the top on the horizontal axis. They will continue their

dominance since they are also rated as the technology leader.

65 Petric (2011)66 Solomon (2011)67 Petric (2011)68 Roumeliotis (2011)69 Kim II (2011)70 Dediu I (2011)71 Camm-Jones (2011)


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Samsung

Product: Samsung are the ones who focus most on having the newest technology

installed. Samsung already had 4G and dual core processors installed on their Samsung

Galaxy S2 by July 2011.72 Samsung Galaxy S2 is considered as one of the best Android

smartphones and it is also one of the thinnest and lightest smartphones in the market. The

reviews show that they have better design ratings than Apple and have the best

performance of all three models. However, their focus on having the best technology

installed has not paid off since their total score is below Apple, but just above Nokia.

Patents: Samsung do not have the best patent situation and they are trying to improve

their patent situation.73 Their exact number of mobile phone patents could not be found.

Apple won a case against them as mentioned earlier, and Samsung have also agreed to

pay approximately $10 to Microsoft for every smartphone sold with Android installed.74

Samsungs patent situation might improve as Google acquired Motorola Mobility. Googleclaimed that they wanted to protect their hardware vendors.75

Potentials: Samsung are well aware of their poor patent situation since they will invest

$9.3 billion in their electronics area R&D. Samsung have a large electronic department,

but most of the investment will be spent on improving their smartphone patent situation.76

Samsung are a relatively small player when it comes to cash reserves compared to Apple.

They only had $9.04 billion in cash reserves by 2011. 77

Trajectory: Samsung are more willing to have the newest technology installed in their

smartphones since they had 4G and dual core installed before Nokia and Apple. Theirfocus on newest technology has although not been received well since they dont get the

highest overall score, but they have decent scores amongst all the parts. Samsung have a

weak patent base, but Googles investments in Motorola might improve their situation.

Their situation is a bit like Nokias since they have almost equal scores and have almost

the same cash reserves. Nokia do, nonetheless, have a better patent situation, but

Samsung have a better product since Samsung were winners in several other reviews.

This places Samsung just above Nokia, but they are close to each other.

72 Kwan (2011)73 Fitzgerald (2011)74 Warren (2011)75 Niccolai (2011)76 Brian II (2011)77 Wilhelm (2011)


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2.2.3 The evolution of the integrated portfolio

Place and trajectory for the three companies

Figure 2 show the dynamics of the integrated portfolio. The market portfolio shows that the

smartphone market is attractive because of high growth and high profits. This explains the

high placing on the market portfolios vertical axis. Apple have the highest market share

and the highest profit share and are placed highest on the horizontal axis. Nokia receive

the lowest placing since they do not have any profits and have the lowest market share

amongst the three. Samsung are placed in the middle. The next figure is the technology

portfolio which is a trajectory of the competitors future market shares. The technology is

moving from the high growth area where they are now towards the lower right corner,

which is the cash cow area. The trajectory is shown in the last figure, the integrated

portfolio, where the companies position is visible for today and where they are headed.

Apple will continue to be the industry leader while the two other competitors are close to

each other.

Figure 2: The three companies in the integrated portfolio

Source: Kloyer (2011), page 17 & 18 with companies plotted

The placing of the three competitors is now known and the next part will be the theory

chapter. This will be followed by how the two industry leaders got to their position by

analyzing their innovation processes and compare them to Nokias innovation processes.

L

Marketattrac

t.

H

Market portfolio

L Competitive strength H

L

Techno.attra

ct.

H

Technology portfolio

L Competitive strength H

L

Environmen

t

H

Integrated portfolio

L Company H

= Nokia = Apple= Samsung


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3. Open innovation the theory

The old innovation paradigm is called the closed innovation paradigm where companies

control their own innovation in order to become successful. Companies came up with their

own ideas, developed them, built them and generally did everything by themselves. This

was a time when: If you want something done right, youve got to do it yourself.78 This

paradigm created some tension between the researchers and the development team. A lot

of the researchers ideas were not realized and were placed on a shelf, potentially

discouraging the researchers.79At the end of last century the closed innovation paradigm

was challenged by a lot of factors and a crucial one was time to market. Another factor

was that the customers and suppliers ideas became more important and companies

could not continue to ignore that knowledge if they wanted to stay competitive.80 This was

the starting point of a new innovation paradigm, open innovation. Henry Chesbrough

defines open innovation as: Open Innovation means that valuable ideas can come from

inside or outside the company and can go to market from inside or outside the company as

well.81 The following figure shows how open innovation operates:

Figure 3: The open innovation paradigm for managing industrial R&D

Source: Chesbrough (2003), page xxv

78 Chesbrough (2003), page xx79 Chesbrough (2003), page 3380 Chesbrough (2003), page xxiiI81 Chesbrough (2003), page 43


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A company can either use open innovation by external knowledge exploration, by external

knowledge exploitation or by external knowledge retention. External knowledge exploration

is about acquiring knowledge while external knowledge exploitation is selling about

knowledge, e.g. by license technology out.82 External knowledge retention is about having

access to knowledge which is not within the firms organization, e.g. through alliance

partners and a company can use all the different variations simultaneously.83A company

has to do own R&D to improve its absorptive capacity for the external knowledge

exploration or retention.84 It is a challenge for a company to manage open innovation and

a company needs to build up organizational abilities to manage open innovation. This can

either be done by creating dedicated organizational structures or by creating incentives to

the employees.85 There is no single best way to manage open innovation and it is not

possible to generalize, since it depends on internal and external circumstances. Optimizing

open innovation is about finding the right mix between internal and external innovationprocesses to create synergies.86

Open innovation is able to pick false positives out (projects that seemed appealing, but

turned out not to be) as the closed innovation paradigm can, but it can also detect false

negatives (project that did not seem appealing, but turned out to be).87 The latter can be

tested by spinning the technology out or by licensing it out. When a company adopts open

innovation they acknowledge that not all the smart people are working within the company;

that there are a lot of good ideas outside a company and that the company does not need

to come up with the good idea to leverage from it.88

Open innovation is not an entirely newparadigm created by Henry Chesbrough. Some have even called open innovation old wine

in new bottles since US companies already performed open innovation several years

ahead of Chesbroughs book from 2003.89 Some argue that open innovation does not fulfill

the requirements for being a new theory and can instead be considered as a framework.90

82

Lichtenthaler (2011), page 7683 Lichtenthaler (2011), page 7784 Lichtenthaler (2011), page 8185 Lichtenthaler (2011), page 8486 Lichtenthaler (2011), page 8587 Chesbrough (2003), page xxv88 Chesbrough (2003), page xxvi89 Mowery (2009), page 1390 Lichtenthaler (2011), page 79-80


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Open innovation need a lot of theoretical and empirical work,91 but open innovation is still

very relevant for the companies in competitive industries.

One of the top open innovation users is P&G. They claimed that P&G had 8,600 scientists

working for the company, but that they had 1.5 million outsiders who came up with new

ideas or technologies for P&G. Their goal was to get 50 % of their innovation from their

workforce from outside.92 Open innovation exploit the massive pool of talents and ideas

placed outside the company and a company should try to leverage from this. P&G started

Connect and Develop (C&D) to improve their use of open innovation. Their goal was to

increase value not to cut cost. This is not done by outsourcing R&D, but insourcing

creativity and by co-creation with external developers. C&D is about finding a need,

describe it and send it to outside developers to get proposals back. If the proposals are

usable, the need might turn into a product.93 P&G do not have scaling as their first priority.

They instead want to know whether they can deliver proper value to the customers andthen scale it up when this has been confirmed.94A company has to be committed in C&D

as it takes time to become a success and management support is important to make C&D

a success.95 P&G changed the mentality from not-invented-here to proudly-found-

elsewhere.96 For C&D to become a success, a company needs to employ people who are

good at scouting, others who are good at screening and finally some ones who are good at

making deals. A company has to nurture the relationship with external R&D developers by

building up trust and giving them incentives to work with the company. Relationship

management is important for P&G as they have 1.5 million external developers.97

However, elaborating other positive aspects of open innovation is not necessary as all

companies mentioned in this thesis are all users of open innovation which will be

elaborated in the next chapter.

91 Lichtenthaler (2011), page 8092 Chesbrough (2003), page xxvii93 Huston et al (2007), page 2194 Huston et al (2007), page 2295 Huston et al (2007), page 2296 Huston et al (2007), page 2397 Huston et al (2007), page 24


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Want, Find, Get, Manage approach98

Managing innovation is crucial for companies today since the industries are constantly

changing. Innovation is a necessity if companies want to keep or grow their businesses,

but companies can have difficulties to manage innovation optimally.99 To concur these

problems, Gene Slowinski has developed a model for optimizing the use of open

innovation called the Want, Find, Get, Manage approach. In this approach Slowinski has

made open innovation more manageable by organizing the different stages within open

innovation. The approach is showed in the following figure:

Figure 4: The Want, Find, Get, Manage Model

Source: Slowinski et al (2010), page 39

Tidd and Bessant have developed a six stage approach for managing corporate ventures

which could also be used for optimizing the use of open innovation. Their approach has

three stages for the definition part and three stages for the development part. They

mention that the most important part is to create an entrepreneurial environment, but this

is also the hardest stage. Managers should be highly committed to the venturing/open

98 The original source is Reinventing corporate growth by Gene Slowinski, but it was not possible

to get the original source.99 Chesbrough (2003), page xvii

Want What are our resource needs? Which ones should weinternally develop? Which ones should we find externally?

Find How do we find and evaluate the external sources oftechnology and capabilities that will fulfill out Wants?

Get What processes will we use to plan, structure andnegotiate an agreement to access external resources?

Manage What tools and metrics will we use to implement andmanage ongoing collaborative relationships?


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innovation by supporting it and by implementing the right processes.100 Their approach

could be an alternative model for how Nokia could optimize the use of open innovation, but

the Want-Find-Get-Manage model is better suited for this thesis as it elaborates the

goal/want part which will be one of the main topics in the analysis:

Want:A want can be achieved through internal R&D and when this is the case, no further

open innovation actions are needed. If internal solutions are not sufficient, the company

can look for ideas outside of the company and the use of open innovation becomes an

opportunity. A company should assess the trade-offs between internal development and

external open innovation opportunities as some companies underestimate the time usage

and cost of developing the asset internally. Companies should be aware of the external

sources of ideas in the want phase as companies could change their path to the goal:

A + E = C

A is the companys own R&D and assets, while E are the externally available tools for

reaching C, which is the goal. Setting the right goals is crucial since it affects the next

phases.101 The E consists of all the different open innovation tools which typically are:

University collaboration

User driven innovationVenture capital

Acquisitions

Inter-firm collaboration (includes supplier and competitors)

Joint ventures

Spin-outs

Learning networks

Licensing (in and out)

The open innovation tools will be elaborated in Nokias open innovation processes since

they use all of the above mentioned tools.

100 Tidd et al (2009), page 461101 Slowinski et al (2010), page 39


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Find: The first phase within the find practice is to figure out what the employees know.

They might not have the final solution, but they are potential experts within the new

technology and can ease the find process since the company might know what to search

for. The company can also look for patent opportunities, literature searches and talk to

universities to gain a better understanding. This once again makes the companys search

more efficient and can reduce the search costs. When a company is searching for a

potential partner, the company should understand that potential partners are also looking

for the best partner. There might be a competition to find the best partner and this is the

case within the electronics industries.102 This is also confirmed by Stefan Lindegaard,103

who argues that being technology leader is very important since the leader typically

becomes the preferred partner. The advantage of being the preferred partner is that the

technology leader gets first access to the newest ideas or technologies which enable them

to get a head start. Lindegaard mentions P&Gs competitors as an example who only sawthe ideas and proposals which P&G had rejected.104 The find phase will give the company

new information about the technology and potential partners which could lead to an altered

want list. The company should then restart the process and send the new wants out to its

employees and other sources who can contribute to get new feedback.105

Get: The find phase should end up with a find list which includes external sources and

something about each source. The get process is about ranking these sources and

assessing whether an alliance with a potential partner is possible. Once again it should bestated that the opposite part is also assessing possible partners in this phase.106 This is

the phase where negotiations are going to take place so most of the misunderstandings

are diminished. This requires that both parties are satisfied with the contract to create a

successful alliance. This can although be a challenge since both parties try to get benefits

over the opposite part. This could potentially harm the alliance and the two parts should

strive for an agreement that is perceived as fair. A fair agreement is a good starting point

for the cooperation and will enhance the chances for success.107

102 Slowinski et al (2010), page 41103 Stefan Lindegaard is an author, speaker and advisor within open innovation - some of this isdone through www.15inno.com104 Lindegaard (2009)105 Slowinski et al (2010), page 42106 Slowinski et al (2010), page 42107 Slowinski et al (2010), page 43-44
http://www.15inno.com/http://www.15inno.com/


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Manage: This is the phase where the companies try to integrate what they agreed about in

the get phase. This is reality and the collaboration will be a test of how solid the agreement

is. If problems occur, the management should immediately try to overcome these problems

since the problems could grow into larger problems and potentially destroy the

collaboration. During this phase it might become apparent that the two companies have

misunderstood the agreement and such misunderstandings have to be resolved through

meetings between the two companies representatives. Their common understanding after

their meetings should be passed on to their employees so everybody have a common

understanding about the agreement. 108

Open innovation has its advantages, but a company should not outsource their entire R&D

through open innovation. Chesbrough argues that it is important for a company to have an

internal R&D and not just rely on open innovation. New technologies do usually not cometo the company as a finished product and the technology has to be integrated into a

companys own products in some cases. The company still has to do some improvements

and implementations and this requires some knowledge which is gained through own

R&D. And a company also needs to have knowledge about which is the right or best

technology to determine what the insufficient technologies are. Internal R&D keeps a

company up to date within a technology and this knowledge can be used to figure out who

the best potential partners are. If a company only relies on acquiring technologies this

could end up in a horrible failure.109

A company needs to have a balance between internalR&D and open innovation. Some of the new goals for the internal R&D will be:110

- Be able to find/select the right technology from the myriad of external knowledge

- Be able to fill out the missing technology pieces that are not externally developed

- Integrate internal and external knowledge to create new systems and architectures

- Make profits by licensing out

The following chapters will therefore include a description of the three companies internalR&D processes besides their use of open innovation to get a full picture of their innovation

processes.

108 Slowinski et al (2010), page 44-45109 Euchner (2011)110 Chesbrough (2003), page 53


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4. The companies innovation processes

This chapter will first assess how the two industry leaders, Apple and Samsung, got their

success by evaluating their innovation strategies. By starting with those two, it becomes

easier to understand Nokias innovation processes and to figure out where they have

possibly failed. The description of their internal innovation processes will have the same

structure and will also include other aspects, such as segments, marketing etc, since these

affect their R&D processes. The sections about open innovation will not have the same

structure as they use different open innovation tools.

4.1 Apples innovation processes

4.1.1 Apples internal innovation process

Innovation strategy and their goal: In 2005 Steve Jobs asked 200 of Apples top

engineers to start working on the iPhone, and two years later the first iPhone was sold.111

The first iPhone in 2007 was a game changer since their radical improvement of user

experience and design set a new dominant design for the smartphones. The competitors

had to improve their former smartphone solutions to be a part of the competition. The first

well functioning iPhone was important since Apple had been able to shift the powers

between carriers and smartphone vendors when they signed the agreement with AT&T.

Carriers were used to set specific requirements to the smartphone vendors, but Apple had

been able to set their own specific requirements and even managed to get $10 per month

from every iPhone customer at AT&T, which was an unthinkable situation before the

iPhone period.112

Apple have gotten successful by primarily focusing on design and usability. This is best

exemplified by how even small children are able to use Apples products and by having no

instructions for their products due to their simplicity.113 Apple have optimized the ease of

use by designing and developing their own products. This means that they own the OS,

the software and design the hardware themselves.114 Steve Jobs once said: One

company makes the software. The other makes the hardware... Its not working.115 He

argued that innovation would be too slow and that the ease of use would suffer as the two

parts cannot be perfectly integrated.

111 Vogelstein (2008)112 Vogelstein (2008)113 Kuang (20 11)114 Breillatt (2008)115 Grossman 2005


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Apple are known for their extreme secrecy within their processes and when launching new

products. Managers have been disciplined to keep a secret and there are certain rooms

where only key employees are allowed to enter.116 The software developers did not know

what the hardware looked like and vice versa when the first iPhone was built.117 This

ensured that only few people knew what the final product looked like. The secrecy gives a

lot of buzz and Apple have turned the one smartphone introduction per year into an event

to receive a lot of free marketing. When a new product is launched, Apple make sure that

the press get a bit of information or make a stunt, like forgetting the newest iPhone at a

bar, to keep the buzz growing. It has been estimated that one of their iPhone launches

received free media coverage for about $400 million.118

Number of models: Apple only launch one new iPhone model per year, but they also

have products in different product categories, such as tablets, laptops, MP3 players etc.They also launch few products every year within the other product categories.119 The few

product launches per year make it possible for Apple to work intensively on few products

and thereby ensure higher quality.120 The few products have also made it possible for

Apple to have only one R&D department for almost all of its product categories. One R&D

department ensures that the user experience is the same across all product categories

and thereby increases user trust. The extra focus on user experience has meant that

Apple are more interested in user friendly technologies rather than technical

performance,121

which was described earlier.Apples narrow product focus in every product category has paid off since they have more

efficient R&D figures when comparing them to Nokias R&D figures. Apple spent 2.5 % of

phone sales on phone R&D in 2010 while Nokia spent 10.2 %. Nokias total phone R&D

cost were $3.9 billion in 2010 while Apple did not spend over $1 billion.122

Design and market research: Apple do not perform any market research since the

customers, according to Apple, cannot predict what they want. It would only be

incremental improvements rather than radical new products. Apple instead have a small

116 Bry (2011)117 Vogelstein (2008), page 4118 Bry (2011)119Apple (2011)120 Breillatt (2008)121 Ragnetti (2011)122 Dediu I (2011)


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design team of 20 designers, led by Jonathan Ive, who try to figure out what they want

themselves. To ensure high quality Apple only hire the best designers in the world and the

designers are paid 50 % more on average than designers at other organizations.123 The

designers are working with a principle called 10 to 3 to 1. They first come up with 10

different, but good ideas when considering a new feature. Three ideas are chosen and the

Apple team spends months improving the three options. The final concept is chosen after

a longer work process. This means that only 10 % of their ideas are utilized, but Apple

believe that this approach enhances creativity and overcomes past restriction.124Apple do

also fail once in a while since they had problems with their antenna on the first iPhone 4,

which was nicknamed the Antenna-gate.

4.1.2 Apples use of open innovation

Acquisitions:Apple do not hesitate to acquire a company or buy expertise to gain faster

access to a technology.125

Interfirm collaboration: Apple have a network of suppliers to manufacture the iPhone

parts since they primarily want to focus on design, software and ease of use. Apple are

leveraging from others inventions and technologies when it comes to the iPhones internal

parts.126Apple have a lot of collaboration partners to make the iPhone look at appendix

D to see most of them. It has been estimated that Apple have over 30 partners for

manufacturing the different parts and that Foxconn are assembling the different parts. The

last part is uncertain since Foxconn have claimed that they do not assemble the iPhone.127

This is another aspect of Apples use of secrecy since nobody should know who

assembles their products. Samsung are a very important partner since they accounted for

26 % of the iPhones total cost. This is an awkward situation for the two companies since

they are fierce competitors in the smartphone industry but also have an important

supplier/buyer relationship with each other. The collaboration between the two has been

endangered because of Apples lawsuit victory against Samsung in the Netherlands.

Samsung reacted by counter-suing Apple for infringements. The two companies have,

however, agreed to continue their buyer/supplier relationship and thereby maintain their

123 Breillatt (2008)124 Breillatt (2008)125 Bry (2011)126 Caulfield (2010)127 iPhone Gadgets (2011)


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love/hate relationship with each other some years ahead.128 Samsung have also benefited

from this relationship as they have been able to scale up their production and thereby

lowered their unit prices.129 In 1999 Apple invested $100 million in Samsung to boost their

production of flat-panel computer displays to ensure a constant supply,130 so it can be

concluded that these two companies have a complicated relationship with each other.

Apple bought components and sources for $7.9 billion in the beginning of 2011 and the

huge quantities forced the unit prices down for Apple. On contrary the unit prices got

higher for Apples competitors because of a parts shortage created by Apple.131 The

manufacturing partners are also controlled by Apple in a tight grip to ensure secrecy. A

confidentiality clause is signed when a supplier signs a contract with Apple which includes

harsh penalties if anything is breached. Apple have multiple suppliers to, once again,

ensure that only very few know what the final product looks like.132

Apple have a large base of external apps developers and apps are important since theykeep customers loyal to the smartphone vendors.133 Apple had over 500,000 approved

apps at Apple app store, which can be observed in appendix C. Apple have higher

requirements for their apps developers and Apple are frequently checking the apps

quality.134 The apps developers also need to have software developer skills which are not

a requirement for Android apps system.135 The iPhone users buy more apps at App Store

compared to their competitors, as Apple sold for nearly $5 billion compared to Androids

$350 million making Apple the most attractive apps partner. It is a profitable business for

the apps developers since Apple keep 30 % while the developers get the rest.136

Licensing:Apple have been forced by the courts to license in and license out which was

mentioned in the technological portfolio.

4.1.3 Assessment of Apples innovation processes

Want: Apple are very focused when it comes to goal setting as they primarily focus on

design, software and ease of use. Apples use of open innovation consists of suppliers to

128The Economic Times (2011)

129 P.K. (2011)130 Davis et al (1999)131 Bajarin (2011)132 Pomfret et al (2010)133 Dowell (2010)134 Vikitech (2011)135 Nystedt (2010)136 Burgess (2011)


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every iPhone hardware part and apps suppliers. They only introduce one smartphone per

year and make a smartphone that they want to use themselves. Introducing one universal

smartphone per year is one of their main advantages, but also a brave action, as it gives

the R&D department much more time to improve their iPhones. Apple do not need to have

the latest technology installed, but instead prefer to have the most user-friendly technology

installed. An example is that they were late comers within dual core and they still do not

have 4G installed since the technology requires two chips. Their clarity within the goal part

eases up the following phases.

Find:Apple enjoy that the suppliers are more than happy to supply Apple with its parts or

apps. As mentioned in the theory it has been claimed that technology leaders get access

to new technologies/ideas before their competitors and that the competitors see the ideas

that the champion has turned down. Apple are not interested in having all the newesttechnologies installed, as Samsung prefer, but they might exploit their position to make

agreements that are in their favor. Even Samsung, a fierce competitor and a supplier, are

very interested in being Apples supplier. Apps developers may also prefer Apples app

system as it generates more revenue which was shown in Apples interfirm collaboration. It

would appear that Apple do not have difficulties to find suppliers since suppliers seem to

prefer them and Apple have the luxury to pick amongst the best partners.

Get: Apple seem to have an extraordinary ability to make contracts that are best forthemselves and the politics seem to be my way or the high way. Suppliers and customers

have felt this since Apple have been able to negotiate lower prices from the suppliers, get

more money from the carriers and demand secrecy on top of that. The get-theory

mentions that an agreement should be perceived as fair for both parties and this does not

appear to be the case for Apples suppliers or customers. Their negotiation skills partly

explain Apples huge cash reserves and it might also be possible to maintain these politics

when Apple make the products that others strive for.

However, their aggressive style could harm future collaborations since the suppliers orcustomers can get tired of being pushed around by Apple. What happens when one of

their future products fail? Their aggressive collaboration history will probably not be an

advantage for them and companies within the smartphone industry should avoid getting

too aggressive. The smartphone industry has been characterized by competitors

collaborating when a company gets too large. The current enemy is Google and a good


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example of competitor collaboration was when Apple, Microsoft, RIM, Sony etc. bought

Nortels pool of patents by outbidding Google by a fivefold.137 For now the focus has been

on Google, but who is next in line when and if Google gets tamed?

Manage: The internal hardware parts of the iPhone are innovations and t