University of Nottingham

Are First-Mover Advantages Really Sustainable? A Case Study of Foreign Mobile Phone Manufacturers in China

Yu-Fang Yang

MSc International Business

Are First-Mover Advantages Really Sustainable? A Case Study of Foreign Mobile Phone Manufacturers in China

By

Yu-Fang Yang

2008

A Dissertation presented in part consideration for the degree of MSc International Business

Acknowledgement

Firstly, I would like to thank to my supervisor, Dr. Chengqi Wang, for his guidance and suggestion in the process of writing my dissertation. In addition, I wish to appreciate the support of my parents, my brother and sister, and friends in Taiwan. Finally, I will offer my heartfelt thanks to my friends in the University of Nottingham for their encouragement and company during this period.

Abstract

The answer to whether the first-mover advantage is a source of sustainable competitive advantage is still debatable. Empirical studies are widely made in many industries. However, many of them are made in the United States. In this dissertation, the first-mover advantages and the resource-based view of a firm are applied jointly to Chinas mobile phone industry to examine whether the first-mover advantages are really sustainable.

According the results, it is found that the sustainability of first-mover advantages depend on many factors. It depends on the resources pre-empted by the first mover at the initial stage and its ability to accumulate and develop new resources. In addition, the resources possessed by the followers are also critical. The resource portfolio of a firm may change over time, especially when the market is in the transitional period or becomes more competitive. Pioneers enjoy the benefits of early entry before the entrance of other rivals. However, the first-mover advantages may perish over time and late entrants may surpass the pioneers if they can not develop new resource portfolio in accordance with the market change.

Contents
Page Acknowledgement Abstract Contents of Figures and Tables Chapter 1: Introduction 1.1 Background 1.2 Aims and Objectives 1.3 Research Structure Chapter 2: Literature Review 2.1 External Analysis 2.1.1 PESTEL Analysis 2.1.2 Five Forces Analysis 2.2 Internal Analysis 2.2.1 Resource-Based View Analysis 2.2.2 Resource Portfolio Change 2.2.3 First-Mover Advantages 2.2.4 The Synergy of FMA and RBV Chapter 3: Methodology 3.1 Introduction 3.1.1 Quantitative and Qualitative Methods 3.1.2 Why Qualitative Method 3.2 Research Design 3.2.1 Case Study 3.2.2 Selection of Case Companies 3.3 Sources of Data 1 1 2 6 8 9 9 10 16 17 21 22 25 27 27 27 28 30 30 32 35

3.3.1 Data Collection 3.3.2 Limitations Chapter 4: Chinas Mobile Phone Industry 4.1 The Macro Environment of China 4.2 Chinas Mobile Phone Industry 4.2.1 Overall Situation 4.2.2 Competition between Local and Foreign Firms 4.3 Triggers for Chinas Mobile Phone Industry 4.3.1 Economic Development 4.3.2 Government Policies 4.3.3 Other Factors 4.4 Characteristics of Chinas Mobile Phone Industry 4.4.1 Highly Technology Concentrated 4.4.2 Intensive Competition 4.5 Five Forces Analysis of Chinas Mobile Phone Industry 4.5.1 Threat of Entry 4.5.2 Threat of Rivalry 4.5.3 Threat of Substitutes 4.5.4 Threat of Supplier 4.5.5 Threat of Buyers Chapter 5: Case Studies: Motorola and Samsung 5.1 Company Background 5.1.1 Motorola, Inc 5.1.2 Samsung Electronics 5.2 Firm Resources 5.2.1 Technology

35 38 40 40 42 42 44 46 46 48 51 52 52 53 54 54 56 57 57 58 60 60 60 61 63 63

5.2.2 Brand Reputation 5.3 First-Mover: Motorola 5.3.1 Discover the Opportunity 5.3.2 100 Percent Control in the Chinese Operations 5.3.3 Long-term Investment 5.3.4 Maintain Guanxi 5.4 Follower: Samsung 5.4.1 A Business Group 5.4.2 Project Execution Ability 5.4.3 Vertical Integration 5.5 Discussion Chapter 6: Conclusion 6.1 Findings and Implications 6.2 Contribution of this Study 6.3 Limitations and Future Research Direction References

66 69 69 70 70 71 72 72 73 75 77 83 83 85 86 89

Contents of Figures and Tables

Page Table 1 Chinas Mobile Phone Market Occupation by Brand in 2005 35 Figure 1 Development of Mobile Phone Market in China, 1995-2006 Figure 2 The Proportion of Mobile Phone Subscriber in China, 2000-2007 Table 2 Chinas Economic Growth, 1978-2005 Table 3 Best Global Brands, 2003-2006 44 48 69 43

Chapter 1: Introduction
1.1 Background As one of the worlds largest emerging markets, China has attracted a large number of foreign direct investments (FDI). Many multinational companies increasingly regard China as a strategic market rather than a production base. Chinas mobile phone industry has flourished in recent years due to remarkable economic performance and great social changes. Many multinational mobile phone manufacturers are drawn in by the very large amount of customers and potential for economic growth. The flourishing industry has been cultivated by continuous economic development and promotion by the Chinese government. After WTO admission in 1999, China took a more open attitude towards foreign investment. In addition, the deregulation and reformation of the telecommunications industry facilitated the development and competition of the mobile phone market as well as the diffusion of mobile phones.

Motorola entered China in 1987 and dominated the local market in the early 1990s. Nokia and Ericsson immediately followed and enjoyed the benefits of Chinas flourishing mobile phone market. Japanese and Korean companies started participating in this market in the late 1990s (Low, 2005) in spite of uncertainty surrounding government policies.

As one of the largest mobile phone manufacturing bases in the world,

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China produced 550 million mobile phones in 2007, accounting for more than half of the worlds production volumes of handsets. Nokia, Samsung Electronics, Motorola, Sony Ericsson and LG electronics contribute to about 70 percent of total production in China (Shen, 2008). Many of them have built local manufacturing facilities and R&D centres in China in order to respond to domestic needs.

The industry structure is undergoing a transition and the level of competition in this industry is getting higher. Companies have to vary their strategies with the changing environment. Accordingly, firm resources are useful as a bargaining counter to compete and survive in the highly competitive industry. This is in accordance with the resource-based view which suggests that firm resources represent a mechanism for competitive advantage (Veliyath and Fitzgerald, 2000).

1.2 Aims and Objectives Firms competing in an industry have competitive strategies. These strategies are developed through a planning process in respect to the environment in which they operate, corresponding to their core competencies. That is to say, firms apply their specific abilities to exploit the potential opportunities in the dynamic business

environment. Therefore, it is essential for a firm to figure out its strengths and explore the opportunities in a market. The core competence of a firm may help it conceive and implement competitive strategies. There are two influential frameworks in the literature on
2

strategic

management,

Porters

five-forces

model

and

the

resource-based view of the firm. The two frameworks examine the same issue from different perspectives. Porters framework suggests that a firms strategy will be affected by the industry structure it works in, whereas Barneys resource-based view of a firm advises that their internal resources and capabilities are sources of competitive advantage. The resource-based view shifts emphasis from external factors toward internal firm resources in the strategic management literature. The two theories can complement each other and both of them are utilised in this dissertation.

As one of the emerging countries in the mobile phone industry, Chinas mobile phone industry has developed for more than twenty years. Motorola entered China as the first-mover in this industry, with a long history of telecommunications market domination. However, Samsung, the latecomer, surpassed Motorola and seized its leading position in a short time. Compared with Samsung, Motorola should have had an advantageous position due to its earlier entry into this market. However, the late entrant, Samsung, in an inferior position due to the lack of local resources and knowledge, struggled against the leading competitors at the time of its entry. Therefore, they might have needed to adopt different strategies in terms of their own firm resources to confront the powerful incumbents.

It can be seen that the sequence of entering a new market may

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influence the strategies implemented by multinational companies. The first-mover may possess the local resources, such as the distribution system, and may have built its brand name firmly in the minds of customers at an early stage. All of these create entry barriers to those who follow. The timing for a newcomer is important. It is easier to succeed when the market is in a transition period, such as when a country is changing its policies and when there is development of new technology in an industry or a shift in consumer behaviour. The economy of China is growing rapidly and it is in the process of transforming its traditional economic structure, thus, it offers many opportunities for multinational companies.

Research questions The purpose of this research is to analyse and discuss whether the sequence of entering a new market will influence the strategies adopted by those multinational companies with different firm resources. In addition, it is also attempts to illustrate how a latecomer to an industry can overcome latecomer disadvantages and

successfully come to stand in a leading position by means of its firm resources. Conversely, why and how a first-mover suffers at the hands of the latecomers, even though they are in an advantageous position, will also be examined. Finally, the dissertation also tries to answer whether the first-mover advantage is sustainable in an industry. All of these research questions focus on the distinctive firm resources held by different companies and are explored and discussed in terms of the resource-based view, with an emphasis on the
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evolvement of firm resources and capabilities.

The resource-based view in strategic management has been developed theoretically and practically tested (Barney et al., 2001). The theory has diffused into many fields of study, including human resources (Wright et al., 2001), marketing (Srivastava et al., 2001), international business (Peng, 2001), and first-mover advantages (Lieberman and Montgomery, 1998). The resource-based view is considered as one of the top three most profound theories in exploring emerging economies (Hoskisson et al., 2000). Furthermore, it is also appropriate when probing into the complexity of competition in emerging economies (Peng, 2002). Therefore, it is proper to apply the RBV to the study of the mobile phone industry in China.

The answer to whether the first-mover advantage is a source of sustainable competitive advantage is still debatable (Li et al., 2003). Empirical studies relating to the first-mover advantages consist of many industries and markets, such as financial products (Tufano, 1989), the pharmaceutical industry, and the frozen food industry (Sutton, 1991). However, most of these studies have been made in the United States (Lieberman and Montgomery, 1998). Therefore, it might be interesting to study the first-mover advantages in other countries. On the other hand, Lieberman and Montgomery (1998) suggest that it will be of great help for further study if researchers can integrate research on first-mover advantages with the RBV theory. For these reasons, the resource-based view of the firm and the
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first-mover advantages will be jointly applied to Chinas mobile phone industry in this dissertation.

1.3 Research Structure The dissertation involves six chapters. The first chapter describes the background, clearly indicates the research questions and outlines the research structure. In the second chapter, the relevant literature on strategic management is reviewed. The literature review is organised into three parts. The broadest layer is the PESTEL analysis used to examine the macro environment. The next layer is Porters five forces model used to analyse the characteristics and threats within an industry. The last part relates to the organisational level, the resource-based view, and it suggests that firm resources determine firm strategies and are the key to achieving a competitive advantage. In addition, the literature on first-mover advantages is discussed and the link between first-mover advantages and the resource-based view is highlighted. The third chapter describes the methodology of this dissertation. Moreover, for greater understanding, a double-case study is used.

The fourth chapter explores Chinas mobile phone industry, giving a portrayal of Chinas macro environment and then identifying the sources of threats in Chinas mobile phone industry. PESTEL is applied to evaluate the macro environment in China, whereas Porters five forces model is utilised to assess the threats in Chinas mobile phone industry and to check which force is the most influential to the
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industry. The interplay between the main players in this market determines the industry structure, which then significantly influences the main player again in return. Moreover, the drivers of the development of the mobile phone industry and the characteristics of it are also considered.

The fifth chapter contains a case study. Two leading global mobile phone manufacturers, Motorola and Samsung, are selected to stand for the major manufacturers in this market. After briefly introducing their backgrounds, their resources are compared and their strategies are reviewed and discussed in light of this. The companies are examined in depth in terms of their R&D capability, brand name, and other specific firm resources. This research examines how these firm resources and capabilities evolve over time and how the two companies exploit them in response to the environmental changes, with an emphasis on the linkage between entry order and the accumulation of firm resources. The first-mover concept is examined using a resource-based perspective. Finally, the dissertation

concludes with a discussion and by outlining the limitations and possible future studies.

Chapter 2: Literature Review

A strategy is a plan for the actions taken to attain one or more organisational goals (Morris, 2005:53). The task of strategy formation is one of achieving a match between the organisations internal skills, capabilities, and resources on the one hand and all of the relevant external considerations on the other hand (Thompson and Strickland, 1986:74, cited by Morris, 2005). In other words, in the strategic management process, both external analysis and internal analysis are needed to be taken into consideration if a firm is eager to formulate high performance-generating strategies. The external analysis includes the realisation of the macro environment in which a firm operates and the attributes of the industry that the firm belongs to. In this way, it is possible for a firm to discover the potential threats and opportunities in the environment. On the other hand, internal analysis helps to determine the strengths and weaknesses of a firm and then helps the firm to conceive and implement strategies that can exploit opportunities or neutralise the threats that may exist.

Firms have their own unique strengths and weaknesses in coping with the external environment and industry structure. However, these are not fixed and change gradually over time. A firm should realise the impact of their environment on the level of performance. Therefore, understanding the external conditions and the industry structure is a good starting point for a strategic analysis. Environmental models help identify the possible resources of a firm, whereas resource-based

models advise on the further attributes needed to be held by those resources that allow them create sustained competitive advantages (Barney, 1991). These two approaches view the same issue from different perspectives and can complement each other to some extent.

2.1 External Analysis Firms usually have to confront uncertain and complex external environments. This turbulence and complexity may damage a firms financial performance. In order to reduce the impact, a firm has to also be able to correspond to the dynamic external environment. In other words, it is of great important to realise the impact on industry and firms resulting from the external environment. Therefore, efficient analysis tools for the external environment are essential. The external environment analysis includes the macro environment and the industry environment (Johnson et al, 2006). PESTEL analysis is useful in analysing the general environment in which firms operate, whereas Porters five forces model is valuable in identifying the sources of threats within an industry.

2.1.1 PESTEL Analysis The broad environment consists of six environmental forces: political, economic, social, technological, environmental and legal (Johnson et al., 2006). PESTEL analysis is usually applied to analysis of the general environment. These elements of the PESTEL framework work dependently and may influence the others. As any one of them
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changes, the general environment will also change. There are some drivers listed on the PESTEL checklist that can help firms to depict the general environmental conditions. These drivers vary from country to country, thus it very hard to identify them. If firms can recognise the key drivers behind the changes, they can develop strategies in accordance with the environment and are more likely to deal with the change immediately. In addition, it is also useful for firms to forecast the future trends, examine the impacts, and thus conceive appropriate strategies, especially in uncertain environments (Johnson et al., 2006). On the other hand, the PESTEL model can be associated with the five forces model to forecast and shape the future structure of an industry (Faulkner and Bowman, 1995).

2.1.2 Five Forces Analysis The next layer in external environment analysis is industry. An industry is defined as a group of firms producing similar goods or services for the same market (Faulkner and Bowman, 1995:39). Porter (1980:5) defines an industry as the group of firms producing products that are close substitutes for each other. Porter (1980) suggests that industry structure can strongly affect the competitive rules in an industry and that the forces in an industry usually affect all the firms in the industry, since these operate their business in the same environment and for similar customers. The information regarding the business environment and the competitors is

particularly important. Therefore, it is crucial for firms to analyse and assess the industry before deciding to commit to it. There are many
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models developed to identify the environmental threats and opportunities facing a particular firm. The most widely known and used one is the five forces framework made by Michael Porter (1980).

Environmental threats are the external factors, such as competitors, people, or organisations, which are able to negatively affect the performance of a firm (Barney, 2007). Since firms are looking for competitive advantages, it is essential for them to identify the environmental threats that may reduce their performance. Threats can increase the degree of competitiveness of an industry, increase the costs and decrease the revenues, and thus, reduce the level of a firms performance. In the five forces model, Porter identifies five of the most general threats confronted by firms in their operational environment. According to Porter (1980), the attractiveness and profitability of an industry are strongly related to the structure of the industry, and, five competitive forces operating in the industry mainly determine the industry structure. Therefore, the critical task of a firm is to find the best position in this industry from where it can protect itself from the threats and have command of the industrial situation (Porter, 1979).

On the other hand, the model points out that an attractive industry, from the perspective of the incumbent firms, is one where the five forces are low, whereas an unattractive industry is one where the power of the five forces is high. The five common environmental
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threats in the five forces model are the threat of entry, rivalry, substitutes, suppliers, and the threat of buyers. The five specific attributes can determine the level of industry competition and profitability together. Suppliers, customers, substitutes, and potential entrants can be regarded as competitors from a broader perspective. There are various sources of the five forces and they will be discusses in turn. It should be noted that if the industry condition changes, the threat of entry will change as well (Porter, 1979).

The threat of entry New entrants to an industry are attracted by profitability and increase the competition in an industry, and may reduce the market share and decrease the profitability of the incumbent firms. The threat of entry depends on the cost of entry and this depends on the barriers to entry. Higher barriers of entry can increase the cost of entry and deter potential competitors from entering the market. There are five main sources of barriers to entry (Porter, 1979, 1980):

1. Economies of scale: Economies of scale can act as a barrier to entry when the optimal size of entry to this market stands for a large percentage of market supply. Therefore, the market is easily exceeded by the supply and new entrants may inevitably accept a cost disadvantage because they do not produce at the optimal level of production. Therefore, this will discourage new entrants from competing with incumbent firms.

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2.

Product

differentiation:

Brand

identification

possessed

by

incumbent companies can deter entry because it is costly for potential entrants to overcome customer loyalty. On the other hand, incumbent firms can create brand recognition by advertising or superior customer service to differentiate themselves with new entrants.

3. Capital requirement: The need for large amounts of capital investment in an industry for it to compete produces a barrier to entry, especially when the expenses are unrecoverable. Companies who are unable to obtain enough financial resources may give up on entering the market.

4. Cost advantages independent of size: The incumbent firms may have a wide range of cost advantages, irrelevant to economies of scale or their size, compared with new rivals who are at cost disadvantages. Cost advantages can create a barrier to entry and incumbent companies can generate these advantages from

proprietary technology, specific know-how, access to the best raw materials or locations, and the experience of a learning curve.

5. Government policy: Governments also play an important role in creating entry barriers. They can set up policies, regulations or standards to directly or indirectly control the amount of firms operating in an industry.

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The threat of rivalry Not only new entrants but also existing competitors can influence the performance of a firm in an industry. The intensity of rivalry among existing competitors is another threat faced. If the competition in an industry is high, the attractiveness and profitability of it are more likely to be low.

When the number of competing firms is large and the sizes of these firms are nearly the same, it is more likely to generate a high level of rivalry. In addition, slow industrial growth also results in a high level of rivalry. The industry that ceases growing makes firms compete for their market share (Porter, 1980). A firm willing to enlarge its market share must do so at the expense of other competitors market shares. Furthermore, if the products in the market have no differentiation to buyers, it will lead to intense price competition because customers can easily find other alternatives.

The threat of substitutes Firms compete with others not only in their industry but also in other industries producing substitute products that can meet roughly the same customer needs. The substitutes may affect buyers willingness to pay (Brandenburger, 2002). They can place a ceiling on the prices firms in an industry can charge and thus limit the potential profits (Porter, 1980). Thus, the substitutes can also threaten a firms financial performance.

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The threat of suppliers Suppliers provide all kinds of raw materials. They can threaten the profitability of a firm by increasing the prices or decreasing the quality of products supplied by them. The greater the bargaining power of suppliers, the greater the threat to a firm. Suppliers can be very powerful in some conditions. The threat of supplier is great when a few firms mainly control their industry or the firm is not the major customer of the supplier. Moreover, suppliers can be relatively more powerful when the products or services provided by them are differentiated or exclusive. In addition, if there are no substitutes competing with the suppliers, they can take advantage of their unique position and squeeze more profits from the purchasers. Finally, suppliers may threaten the firms they supply when they have the ability to integrate forward. By doing this, they become both suppliers and rivals and enter the firms industry to compete with them.

The threat of buyers Buyers purchase the products or services from firms. Buyers can reduce a firms revenue by cutting prices or asking for higher quality or greater services while they are in a relatively stronger position compared with the producer. Buyers can be very powerful in some conditions: Firstly, if the number of buyers is small or the purchases are concentrated on or dominated by few buyers; Secondly, if the products or services are standard or not differentiated, the buyers can easily find alternative suppliers; Thirdly, if the purchase of the products or services occupies most of the buyers purchases or the
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buyer earns low economic profits, they are likely to be higher price sensitive and demand lower prices. Finally, the buyers may be very threatening when they have the ability or skills to integrate backwards and become the suppliers themselves. They can obtain better bargaining positions because they can be potential rivals and compete with the supplier.

Summary The five forces framework is useful for analysing the structure of an industry. Brandenburger (2002) praises Porters model for building a clear vertical chain of economic activities running through the main players of the chain, from suppliers through business entities and then to the buyers. The analytical framework can help a firm comprehensively analyse its industry as a whole (Porter, 1980). A firm can develop an effective strategy to counteract the negative effect resulting from the five forces after fully understanding the five features of the industry (Porter, 1985). The dominant forces are different from industry to industry and from country to country. The stronger the competitive force or forces influence the profitability of an industry, the greater the importance of them in determining the strategy (Porter, 1979). The genuine advantage of this approach is to help managers to assess the five forces operating in the industry and thus to develop a broader insight into the market environment.

2.2 Internal Analysis Having analysed a firms macro environments and industry structure,
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the internal strengths and weaknesses can certainly not be neglected. Knowledge of the companys capabilities and of the cause of the competitive forces will highlight the areas where the company should confront competition and where avoid it (Porter, 1979:143). Porter suggests that a firm can determine which market to compete in or avoid after fully understanding the power of the five forces and the strengths of the firm. In other words, after analysing the industry structure, it is essential for a firm to realise its strengths and utilise them well to deal with the five forces and generate competitive advantages.

Strengths for a firm may include brand reputation, innovative technology, strong distribution channels, large market share, etc. In order to develop an effective strategy, a thorough understanding of the strengths and weaknesses of the firm is required. Traditionally, SWOT analysis is used to identify a companys external opportunities and threats as well as the internal strengths and weaknesses. In comparison with SWOT analysis, the resource-based view mainly focuses on the firm resources and examines the relationship between the internal resources of a company and the level of its performance (Barney, 1991).

2.2.1 Resource-Based View Analysis Wernerfelt (1984) was the first to articulate the resource-based view. He argues that the key resources controlled by a firm allow it to achieve sustainable competitive advantages. Barney is one of the late
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contributors and he explicitly discloses the four characteristics of key firm resources (Barney, 1991, 2007).

The resource-based view of a firm puts emphasis on the resources controlled by a firm and regards them as the source of competitive advantage (Barney and Hesterly, 2006). A resource is meant as anything which could be thought of as a strength or weakness of a given firm or those (tangible and intangible) assets which are tied semi-permanently to the firm (Wernerfelt, 1984: 172). Barney (1991:101) defines that firm resources include all assets, capabilities, organisational processes, firm attributes, information, knowledge, etc. controlled by a firm that enable it to conceive and implement strategies that improve its efficiency and effectiveness. Therefore, they can be regarded as the strengths of a firm. Firm resources are tangible or intangible. Tangible resources are physical resources, such as facilities and equipment, while intangible resources include know-how, a firms culture, and reputation.

On the other hand, resources can be classified into four categories: financial capital resources, physical capital resources, human capital resources, and organisational capital resources (Barney, 2007). Financial capital resources are those that can be used as money resources to support the strategies, including equity, retained earnings, and debts. Physical capital resources include machinery, geographic locations, and buildings. Human resources contain knowledge, experience, and human training. Organisational capital
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resources comprise organisational culture, structure, and informal systems. However, it should be noted that not all aspects of financial, physical, human, and organisational capital are able to contribute to competitive advantages and to be considered resources (Barney, 1991). Some of a firms capital may have no influence on the process of shaping and carrying out competitive strategies while others may lead to inefficient strategies.

The internal view suggests that obtaining competitive advantage mainly relies on the resources controlled by the firm. Companies who command valuable resources or have distinctive capabilities that few firms have, may gain sustainable advantages. However, the

consequence is based on two assumptions (Barney, 1991). Firstly, resources are assumed heterogeneous. Firms operating in the same industry may have different stock of resources. They may differ from each other in terms of the different resources they hold. Some firms may excel in the rest of the industry in some specific activities. Secondly, he assumes that the resources are immobile. Some resources may not be perfectly mobile among firms and it may be expensive for rivals to imitate or develop them. Therefore, the resource differences may last a long time. However, it should be noticed that sustainability is determined on the basis of the likelihood of the competitive advantage being duplicated (Barney, 1991). This is opposes of Porters (1985) definitions, as he defines sustainable as a competitive advantages that can last a long time.

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Naturally, not all the resources have the ability to generate competitive advantage. There are some characteristics of firm resources that allow them to create competitive advantages. Barney (1991) develops a tool to test whether the different resources controlled by firms have the potential to produce competitive advantage. By doing this, a firm can determine its internal strengths and weaknesses. He suggests four features that must be

simultaneously held by potential resources: the resource must be valuable, rare, imperfectly imitable, and not be equivalently substituted.

Characteristics 1. Value resource: Resources are valuable when they are able to help a firm conceive and implement strategies that can exploit

opportunities or neutralise threats and enhance its performance (Barney, 1991).

2. Rare resource: Furthermore, the valuable firm resource should not be held by a large number of firms. If such a resource does not solely belong to a firm but is simultaneously owned by many firms, it is useless for generating competitive advantages.

3. Imperfectly imitable: In addition, the resources are needed to be imperfectly imitable. That is to say other firms are not able to copy and acquire their value and rare resources. There are three conditions under which the firm resources can be imperfectly imitable. Firstly,
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the resource is closely tied up with a firms history or specific historical circumstances. With the development of a firm, it obtains knowledge, accumulates experience, develops operating systems, and thus cultivates unique resources. Secondly, the resource has casual ambiguity. The uncertainty of the causal relationship between the resources and effective performance limits the imitation of rivals. Rivals do not know what and how to copy it since they do not understand the causal links between the actions and performance. Finally, the resource is socially complex and it is hard for firms to utilise their ability to manage and affect it in a planned way. A case in point of this is the organisational culture (Barney, 1986).

4. Not equivalently substitutable: There must be no alternative resources that are equivalent substitutes. Rivals with this kind of substitute resource that can deliver the same effect and can conceive and implement a similar strategy in different way to compete with the firm in the same market. Therefore, the firms competitive advantage will vanish.

2.2.2 Resource Portfolio Change Resources that have possession of the four foregoing attributes are called VRIN (value, rare, imperfectly imitable, and not equivalently substitutable) resources (Barney, 2007). The resource-based view discusses the links between the firm resources and firm performance and indicates that firms can generate competitive advantages with firm resources. However, a firm cannot achieve advantages merely
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because they have abundant resources. In practice, a firm needs to be able to manage and combine the resources and apply them to strategies to achieve competitive advantages. In other words, a company must be organised to fully exploit the VRIN resources. This corresponds to the integrated framework, the VRIO framework, introduced by Barney and Hesterly (2006) to supplement the VRIN framework. O represents organisation and puts emphases on the complementary resources, such as policies and process, which can facilitate the most use of VRIN resources.

Moreover, from a long-term view, strategies need to be adjusted over time in compliance with the changing environments. The values of resources may perish or disappear as the environment changes. Therefore, in addition to protecting the existing resources from being imitated, it is essential for firms to pursue new resources in the evolvement of the strategies to maintain long-term competitive advantages (Ambrosini, 2007). In other words, the competition in a market may lead to the change of firm resource portfolio over time.

2.2.3 First-Mover Advantages Many empirical studies illustrate that pioneering firms acquire superior resources and capabilities, enjoy the first-mover advantages, and thus generate higher levels of market share and financial performance than later entrants (Frawley and Fahy, 2006). First movers are considered to have the ability to seize or appropriate various kinds of resources in advance of other rivals. These
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advantages contribute to the ability of early entrants to earn positive economic profits and are defined as the first-mover advantages (Lieberman and Montgomery, 1988, 1998). The first mover may be able to forestall various types of resources. Lieberman and Montgomery (1988) argue that there are three key sources bringing about first-mover advantages: technological leadership, pre-emption of assets, and buyer switching costs.

The technological leadership advantages result from successful patents and R&D and the learning or experience curve advantage. The first-mover can take the lead in developing the technology critical to the industry. Moreover, if the technology can be patented or protected from being imitated by rivals, the first mover can gain advantages. However, patents are useless in some industries and in some countries where the technologies are easy duplicated by the followers. The study of Levin et al (1987) indicates that advantages derived from patents are less important than the learning curve advantages. The learning curve advantages arise when the costs fall with cumulative output. The pioneers can gain low cost positions if they can maintain a major market share and when the learning can be kept proprietary (Lieberman and Montgomery, 1988). Moreover, the learning curve advantages can create considerable entry barriers under certain conditions (Spence, 1981).

The first mover may gain advantages through pre-occupancy of rare resources. These assets may be non-mobile or mobile physical assets
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(Lieberman and Montgomery, 1988). The non-mobile assets consist of natural resource deposits and superior locations while the mobile assets include employees, distributors, and suppliers. However, the advantages derived from mobile human resources are considered difficult to maintain. Moreover, the pre-emption of prime positions in space is another kind of advantage, such as the geographic space, the product space, and the technology space. First-movers can establish and strengthen their positions by occupying superior geographic locations or broadening product lines to minimise the space available to the followers (Lieberman and Montgomery, 1998).

First movers may be able to influence the purchasing manner of consumers and consumer preferences may be moulded to favour the first entrants products (Lieberman and Montgomery, 1998). The late entrants need to spend more resources than first entrants to attract customers from the pioneers on the grounds of the buyer switching costs. Switching costs include the money and time spent in adapting to the new products. First-mover advantages arise when the switching costs are high. Furthermore, early entrants may generate value when buyers have imperfect information about the product quality. It is reasonable for customers to adhere to the brands that satisfy them for the first time. Therefore, it is easier for pioneers to pre-empt customer perception and generate brand loyalty than late entrants. The empirical studies of Kardes and Kalyanaram (1992) and Carpenter and Nakamoto (1994) demonstrate that the entry order may influence consumers perception of brands and influence the
24

consumer preference formation. First entrants may be able to establish a unique position in the minds of buyers.

2.2.4 The Synergy of FMA and RBV Even though the first-mover advantages (FMA) are broadly discussed in literature, it is criticised for being overly general. As a focus for empirical research, the concept of first-mover advantage may be too general and definitionally elusive to be useful (Lieberman and Montgomery, 1988:52). For further work, Lieberman and

Montgomery (1998) suggest synergy with the resource-based view of the firm (RBV).

Both FMA and RBV are distinguished current research approaches. FMA is considered too general and lacking in a theory base while the RBV is criticised for the absence of empirical studies on the accumulation of resources and capabilities over time (Porter, 1991). The combination of FMA and RBA can complement each other and work jointly for further studies. The resource-based view provides the framework for the deeper and more complicated studies of the entry order. Conversely, the empirical studies on first-mover advantages offer practical knowledge of the evolution of firm resources and capabilities and provide potential research aspects for the

resource-based view (Lieberman and Montgomery, 1998). Kerin et al (1992) also approve of using the resource-based view as studying the first-mover advantages needs insights into a firms resources and how they are transformed into advantages. Therefore, it would be
25

beneficial if the research regarding first-mover advantage is repositioned within a wide theoretical framework of the

resource-based view.

First-mover advantages occur within a multiple process and it is assumed that there must be some asymmetry between competitors that the early entrants can exploit (Lieberman and Montgomery, 1988). In other words, the first-mover advantages arise when the first entrant owns some exclusive resources in comparison with other firms. This is corresponds to the statement of the resource-based view. Barney (1991) argues that for the existence of first-mover advantages, the competing firms must be heterogeneous in the resources they possess. That is to say, if the firms in an industry are homogeneous in terms of the resources they hold, it is impossible for any firm to acquire the advantages from early entry.

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Chapter 3: Methodology
3.1 Introduction A proper methodology must meet the needs and criteria of the research. There are many kinds of research methods. Every approach has its own advantages and disadvantages. The following section introduces a variety of research methods available and illustrates how this research is undertaken.

3.1.1 Quantitative and Qualitative Methods Generally, there are two types of methodologies, the qualitative method and the quantitative method. Quantitative research focuses on statistical analyses and picks samples at random from a given population. Conversely, qualitative research engages in improving the understanding of a phenomenon and needs to select the participants purposefully (Polkinghorne, 2005). The primary function of using a quantitative approach is to provide comparable numeric data by which the researcher can draw conclusions. It can avoid subjective interpretations and personal perceptions to a certain degree and generate objective outcomes.

Van Maanen (1983:9) defines the qualitative approach as an array of interpretative techniques which seek to describe, decode, translate and otherwise come to terms with the meaning, not the frequency, of certain more or less naturally occurring phenomena in the social world. In other words, the primary task of the qualitative approach is

27

to congregate a general idea rather than quantify individual experiences. The data gathered by qualitative research is narrative and descriptive rather than numeric and depends on researchers explanations to develop the ideas.

The scientific method is a systematic step-by-step procedure following the logical process of reasoning (Clover and Balsley, 1984:19). There are two kinds of reasoning, inductive reasoning and deductive reasoning. Inductive reasoning is utilised to establish a new theory while deductive is used to test an existing theory. Deductive reasoning starts with an existing generalisation and tries to test whether it can be adopted by a specific case (Clover and Balsley, 1984). Inductive reasoning tries to reach a general conclusion by studying many individual cases (Hyde, 2000). Qualitative research usually adopts inductive reasoning whereas quantitative research usually applies deductive reasoning (Yin, 2003a).

3.1.2 Why Qualitative Method The selection of research methods depends on the research question to be explored. The aim of this research is to examine the relationship between the order of entry and the firms performance in terms of the resource-based view. For the purpose of this study, the research needs to take into account the evolution of a firm and explore the accumulation of its resources and the difference between firms in industry. Large-sample studies are useless since they can not unravel the complicated interaction between those variables (Rouse and
28

Daellenbach, 1999). If a researcher tries to study two specific cases to reach a general conclusion, this is the process of inductive reasoning. Hence, quantitative approaches will not be effective in the research of competitive advantages, whereas the qualitative approach allows the researcher to gain comprehensive understanding of the research issues.

Furthermore, organisational phenomena can be portrayed more clearly and in detail via qualitative methods (Yin, 2003a). In the study of firm resources, qualitative approaches enrich their depiction and help the researcher to disclose the key resources contributing to sustainable competitive advantages. In addition, most resources contributing to sustained competitive advantages are intangible and difficult to assess (Hall, 1993). Given such limitations, Rouse and Daellenbach (1999) suggest employing qualitative approaches to analyse the intangible resources.

When exploring the high and low performance of firms, Reed and DeFillippi (1990) advise applying a case study approach by which firms can be compared in terms of their performance. Zahra and Pearce (1990) also support this perspective. A case study approach is employed in this research for reasons given in the following section.

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3.2 Research Design 3.2.1 Case Study Which approach to use depends on the needs and assumptions of the research, and must be coherent with the purpose of the research. Case study is a widely used approach to collect deeper and more detailed information from organisations and it is believed to be a strict research strategy (King, 2004). A case study is beneficial for deeply appreciating and analysing issues. Yin (2003a: 8) in appreciation of case study states that, its unique strength is its ability to deal with a full variety of evidence-documents, artifacts, interviews, and

observations. In addition, it is appropriate to use how and why questions instead of what and how much questions (Hartley, 2004) because the case study strategy lays stress on examining interactions between the events rather than finding out context from the research. Moreover, a case study serves as the best approach to realise the life in an organisation in detail (Hartley, 2004). These features of a case study approach cater to the research questions and the purpose of this dissertation. The proposition of this study is to determine whether and how a latecomer in an industry can become an industry leader by exploiting its firm resources.

The development of an industry or a firm and evolvement of firm resources are very complicated and take a long time. A case study presents an account of what happens to a business or industry over a number of years (Hill and Jones, 2007). As a result, it is appropriate to undertake a case study in this research. Furthermore, the implications
30

of the theories are clearer when they are applied to case studies. The theories help disclose the true nature a firm and allow researchers to analyse and evaluate the actions or strategies adopted by a firm. The dissertation is proceeds under the theory of the resource-based view. The resource-based view will give clear explanations when practically applied to the case study.

After deciding to adopt a case study, there are still some things need to be taken into consideration. The research procedure being used and the organisations being studied are needed to be made clear. The background and history of an organisation can provide a general overview and map out its current functions and operations (Hartley, 2004). In a case study, after gaining an overview, the researcher can start to plan out the research. According to Yin (1994), making a research protocol is beneficial to collecting data. It provides a direction for the research and makes every step clear, from the research theories, the research question, methodologies, to the time control. Moreover, the protocol is flexible and the researcher can adjust the strategy in the course of the research. In this research, the contents, which outline the structure of the dissertation and highlight the points, are made in advance. However, the contents are flexible and can be modified in line with the research questions and the discovery of new information.

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3.2.2 Selection of Case Companies The primary concern is how to choose the case study organisations (Hartley, 2004), whose features need to fit the purposes and the needs of the research. Moreover, the researcher also needs to take into account the possession of resources and the time required to undertake this research to determine how many organisations to study. Before selecting the cases, extensively researching relevant articles or the press may be more beneficial than taking a more rash approach. Yin (2003b) points out that a researcher needs to list the possible cases in advance and screen which cases can conform to the topic and to avoid choosing cases that are too specific and confusing for readers. On the other hand, if the researcher has the ability to conduct more than one case study, the level of the reliability of the findings can be enhanced through the comparison (Hartley, 2004). In addition, for the purpose of comparison, the degree of the contrast between alternative organisations also needs to be of concern.

Stake (1995) suggests that researchers to organise research issues into a few research questions. The major research question of this dissertation is to explore why and how latecomers to an industry can overcome the inherent disadvantages and successfully come to stand in a leading position by means of firm resources. Clearly, there are two players in this research question, the first-mover and latecomer. Therefore, it is appropriate to use two cases in this research. One represents the first-mover whereas the other represents the latecomer. In addition, it is beneficial if the two companies operate in
32

the same industry but contrast with each other. Therefore, this dissertation examines two companies within the same industry.

Rouse and Daellenbach (1999) advise a sample selection process with four steps. The process starts with the selection of the industry, continues with the comparison of the firms performance, and ends in identifying firms with high or low performance. The choice of a specific industry is important because industry factors affect the strategies of firms within it (McGahan and Porter, 1997). Identifying the firms with low and high performance facilitates a clear comparison. Nevertheless, it should be noticed that gaining a deep knowledge and understanding of the firms is essential in this process and it does not make sense to simply select the best and worst performing firms for case study (Rouse and Daellenbach, 1999).

Two cases are selected from foreign mobile phone manufacturers with well-known brand names and reputation. Both of them have national representation and occupy a large number of the market share. There are considerable differences between business cultures and practices in the US and Korea. However, the researcher simplifies the cultural complexity and puts emphasis on the complexity of resources. Both Motorola and Samsung are leading international mobile phone manufacturing firms in China. Motorola is the first global mobile phone producer with a long history in telecommunications to enter China, in 1987. Motorola dominated Chinas mobile phone market and its market share was more than half during the 1990s (Simpson,
33

2005). Motorola took the advantage of being the first-mover and enjoyed the boom of the mobile phone market. However, due to the increasing levels of competition, its market share is dropping and both local and foreign manufacturers are threatening it.

Samsung followed on the trail of Motorola, Nokia, Ericsson, and Japanese companies when the market had become highly competitive. The achievement of Samsung in mobile phone industry is remarkable. It has been active in the mobile phone industry for merely a short period of time but has jumped to the top ranks of mobile phone manufacturers. According to the data released by China-based CCID consulting, Nokia, Samsung, and Motorola were the top three vendors in terms of the production of mobile phone in China in 2007 (Shen, 2008). In addition, both of them are skilled in the Code Division Multiple Access (CDMA) model and Motorola had always been the number one player in Chinas CDMA market. However, Samsung exceeded Motorola for the first time and predominated the CDMA market in China in terms of market share in 2003 (Lee and Lee, 2004). As shown in Table 1, in 2005, Samsung still led the CDMA market, in terms of sales value, with a market share of 31.16% whereas Motorola only occupied 10.18% (Hwang, 2006).

Case analysis of Samsung provides a complete description of their successful take-over of the industry dominance of Motorola. In conclusion, Motorola and Samsung are selected in this dissertation because they provide good examples for the concepts to be studied
34

and they contrast well with each other.

Table 1 Chinas Mobile Phone Market Occupation by Brand in 2005

Source: DIGITIMES, 2006.

3.3 Sources of Data 3.3.1 Data Collection According to Huettman (1993), convincing findings are based on multiple resources. In other words, using different research

approaches can confirm the credibility. Because data is often scattered and difficult to find, adopting different kinds of information collection methods can help researchers to gather the information required. However, the availability of data influences the type of information gathered as well as affecting the collection approach adopted (Clover and Balsley, 1984). Due to the time limitations and
35

the difficulties gaining access to the organisations, the sources of data in this dissertation are mainly external.

In order to make up for the restrictions, the research base is collated from extensive sources of secondary data. Comprehensive and comparative data regarding organisations is critical for a full understanding of competitive advantages (Rouse and Daellenbach, 1999). These resources will serve as the base for further comparison.

Sources of data As mentioned above, the difficulties in gaining access to the sources of primary information leads a dependency on secondary data. Secondary data is sometimes more useful than primary data and can provide vast advantages (McDaniel and Gates, 1999). For example, it can answer the research questions more economically and can also help primary data to be interpreted more clearly.

The data collected via many sources, such as textbooks, academic journals, corporate websites and annual reports, newspapers, magazines, government websites and business press, are the primary sources for this dissertation. The data is gathered and arranged in line with the two mobile phone manufacturers. Different kinds of data are collected for different purposes. Browsing the company websites and reading annual reports, journals, and newspapers enables the researcher to form a general idea of the industry and the firms. Textbooks and journals are of great help for the literature review. The
36

statistics provided on government websites, business magazines, and newspapers help to map the trends of the industry and gain the latest information. The review of both firms reports and external articles offer a different view for comparison.

Eisenhardt (1989) argues that researchers should provide enough evidence to support their opinions and allow readers to assess and judge the arguments by themselves. In order to echo this requirement, the researcher collects the figures, graphs, and the statistical data in journals, newspapers, commentaries and websites to enhance the credibility of the study. Numerical data is arranged in tables or displays to make them clearer and include such things as rankings and performance indices.

Data collection In order to prevent the danger of being overwhelmed by the data, the resources are carefully checked against the theories and only those having relevance with the propositions are applied in this study. By doing this, the bias of early impressions can be reduced to a certain degree (Hartley, 2004). Moreover, the various kinds of resources and evidence are reviewed and compared with each other to keep the consistency of information and avoid contradiction.

In this research, the data is organised around the key theories (five forces analysis, the resource-based view of the firms, and the first-mover advantages), the key firms (Motorola and Samsung), and
37

the key market (the mobile phone industry in China). Following this data is examined and reviewed to see it fits the research questions or not.

3.3.2 Limitations Few resources Barney et al. (2001) suggest a need for longitudinal analysis including both qualitative and quantitative methods in the study of sustained competitive advantages. Yin (2003a) also advises that using multiple approaches and triangulation of data makes for a better paper. However, given the limited duration of the research, it is challenging for the researcher to conduct both approaches simultaneously. In addition, using secondary data makes it difficult to carry out the research critically as former analysis may influence the current study.

Case study Even though the attributes of the case study approach are appropriate for this dissertation, there are still some limitations and

disadvantages in implementing this technique. The data is collected via literature research and second hand data regarding the two mobile phone manufacturing companies and the study is constrained to Chinas mobile phone industry. In a case study, generalising findings to other social phenomena is essential (Eisenhardt, 1989). However, sometimes it is difficult for one particular case to represent a general view and that research results might not be applied across other cases. This is the problem of a lack of representativeness (Hamel et al.,
38

1993). In the point of Hyde (2000), if a specific case study can provide sufficient information and have deep concern with the general phenomena under investigation, it is possible to build a generalisation. However, every specific case still has its own character and methods that need to be taken into account when doing research.

In addition, the case study approach is also criticised for its lack of rigidity (Hamel et al., 1993). The lack of rigidity refers to problems of bias resulting from the researchers subjective point of view or the information utilised. Researchers may have their own assumptions or expectations about the research outcomes prior to the research commencing. The bias arises especially when the information is collected through personal observations and explained from personal viewpoints.

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Chapter 4: Chinas Mobile Phone Industry

4.1 The Macro Environment of China Before starting out to examine Chinas mobile phone industry, it is beneficial to understand the framework the industry exists in. Although China is highly integrated with the world economy and trades with other countries frequently, almost all economic activities and large enterprises were owned or controlled by the government at the beginning of the countrys history. The concentration on heavy industry was the main driving force of economic development (Williams, 2005). Nevertheless, China commenced gradually shifting its economic structure from a planned economy to partial

market-oriented economy in 1978 (McKibbin and Woo, 2003). This aimed at reducing the states interference in the market and this new economic structure is undoubtedly a key explanation of the rapid growth that was observed (Sachs and Woo, 2000). Significant restructure and reform in China has led to a high average growth, 6.04%, in real per capital GDP in the period of 1978 to 1995 (Walmsley et al., 2006). The more open attitude also reflects governments confidence in managing market competition and firms capability to compete (Roseman, 2005).

A very large population is Chinas greatest resource. China has exploited the competitive advantages in labour -intensive and export-led manufacturing (Sachs and Woo, 2000). However,

constraints on foreign direct investments are still high and the vast

40

bulk of the economy remains controlled by the state (Williams, 2005). Considerable pressure has been exerted on foreign investors to ensure technology transfer, especially in the case of joint venture. This approach allowed domestic firms to acquire or cultivate new technologies from foreign partners through joint venture or alliance to enhance production efficiency and performance.

After the economic crisis of the 1980s and 1990s, The Chinese government came to consider liberation a good therapy for economic development and has gradually relaxed restraints on private businesses (Nie and Zeng, 2003). In an effort to boost foreign investment, China offered a number of incentives, such as reductions in the rate of income tax. This proved successful and foreign investment soared in 1993. However, the rate of growth in FDI dropped in 1996. The absence of a well-regulated market and the dominance of inefficient state-owned enterprises in some industries cut down foreign investors confidence in China (Walmsley et al., 2006).

Chinas accession to World Trade Organisation (WTO) at the end of 2001 helped remedy the fundamental problems within this market, improve the business climate, and thus promote foreign direct investment (Walmsley et al., 2006). In the agreement, China is under the obligation to carry out many dramatic changes in trade-related policies. The state has to eliminate both tariff and non-tariff barriers and open the markets of service sectors (Nie and Zeng, 2003). The
41

opening-up of the telecommunication sector enlarged the need of mobile phones, benefiting the mobile phone manufacturers.

In addition, technological development goes hand in hand with economic growth. With the support of the government, China has made achievements in many fields. The access to foreign technology through FDI, joint venture and licensing led to a positive influence on industrial performance. The rank of China in the CIP (Competitive Industrial Performance Index) jumped from 61 in 1985 to 37 in 1998. This rise implies Chinas tight involvement in the global production scheme (Zhao and Zhang, 2007).

In

summary,

China

has

created

more

advantageous

and

well-regulated business environment for the mobile phone industry in the recent years. Higher economic performance and the huge population make it attractive to investors. Technology development also contributes to the foreign investment. A lower level of limitations and higher degree of equality make it a favourable place to invest in.

4.2 Chinas Mobile Phone Industry 4.2.1 Overall Situation Chinas mobile phone market has undergone a dramatic development and become the worlds largest mobile phone market. From Figure 1, it can be seen that the number of mobile phone subscribers in China grew gradually year by year between 1995 and 2006. The number of users has risen significantly from 3.63 million in 1995 to 461 million in
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2006. It can also be seen that there was a significant breakthrough in 2001. The number of subscribers exceeded 100 million and climbed to 144.81 million in that year. In October 2007, the number ascended to 8.132 million breaking the record for single month growth (MII, 2008). The high-speed growth is still maintained to this day. According to recent statistics reported by MII (2008), the number of users increased by 17.941 million in the first two months of 2008 and reached to 565.227 million. The proportion of the subscribers to population is also getting higher. However, the annual growth rate has decreased gradually since 2000, as shown in Figure 1.

Figure 1 Development of Mobile Phone Market in China, 1995-2006 Source: Jin, J and von Zedtwitz, M. (2008) Technological Capability Development in China's Mobile Phone Industry, pp. 333.
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The telecommunication sector consists of fixed and mobile phone subscribers. According to Figure 2, the portion of mobile phone subscribers in the telecommunications sector has increased steadily since 2000. 2003 was the first time that the number of mobile phone subscribers surpassed the number of fixed phone subscribers. The proportion of the mobile phone industry came to 58.9% in 2007 and China became the worlds largest market in terms of subscribers of mobile phones.

Figure 2 The Proportion of Mobile Phone Subscriber in China, 2000-2007 Source: Ministry of Information Industry (MII) Website

4.2.2 Competition between Local and Foreign Firms China is the biggest manufacturing base in the world. Nearly half (46.9%) of worlds mobile phone production, around 970 million units,

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in 2006 came from China (Circuits Assembly, 2007). The main manufacturing sites are Shenzhen, Tianjin, Beijing, and Suzhou. The five leading international mobile phone manufacturers, Nokia, Motorola, Samsung, Sony Ericsson, and LG, have built manufacturing stations in those areas. These places have constructed a mobile phone supply chain in China.

Even though Chinas mobile phone market is dominated by international vendors, the local manufacturers increasingly take the lions share in this market. The production of mobile phone in China was up to 279 million units in the first half of 2007. Nokia, Samsung Electronics, Motorola, Sony Ericsson and LG Electronics contribute to 65% of total production in China. However, the market share of the foreign manufacturers has decreased by 7% in comparison with the record of 2006 (Shen, 2008).

In the ever-growing market, both foreign and domestic are competing for the market share. In terms of domestic firms, price is the focus of their competition while most of them are targeted at low-end market. Conversely, foreign firms mainly concentrate on high-end market. The ability to produce products at low manufacturing cost helps domestic firms wrest market share from foreign rivals because Chinese consumers rate price more highly than other features (Lenton, 2003). Moreover, domestic manufacturers have accumulated a lot of experience and knowledge through the development of new technology and the cooperation with foreign business partners. In
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addition, domestic firms are likely to be able to design and provide diversified mobile phones which fulfil Chinese customers needs. With regard to sales channels, foreign firms mainly sell their products in big cities whereas domestic firms prefer to establish their own distribution channels which cover small and medium sized cities where the demand of mobile phone is growing due to the increasing disposable income (Lenton, 2003).

The low price strategy, the high speed of introducing new products, and the ability to establish sales channels and meet the niche market outside big cities facilitate the growth of domestic mobile phone manufacturers.

4.3 Triggers for Chinas Mobile Phone Industry Continued economic performance and the higher purchasing power of customers, the deregulation and liberalisation of the mobile phone market, a positive and favourable regulatory environment, and increased geographic spread of network services jointly facilitate the development of the mobile phone industry and drive mobile phone penetration in China.

4.3.1 Economic Development With the rapid economic development, Chinas position on the international stage is getting more and more important. Since the start of a serious of reforms in 1978, China has achieved remarkable average annual growth rates of gross domestic product, as shown in
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Table 2. This impressive economic performance has significantly altered Chinas economic and social structure. A large proportion of the labour force working in agriculture declined from 70.5% in 1978 to 44.8% in 2005 (National Bureau of Statistics of China Website, 2008). Chinas reduction of state control and monopoly power resulted in fast entry for new firms. Furthermore, the open attitude has attracted a large number of foreign direct investments and China became the largest recipient of FDI in the world in 2003 (National Bureau of Statistics of China Website, 2008). China has gradually integrated with the world economy more tightly.

Table 2 presents Chinas average annual growth rate of GDP between 1978 and 2005. China reached a significantly high growth rate in 1984 and 1992, with an annual growth rate of 15.2% and 14.2 respectively. Although there are some fluctuations during this period, the economic performance is still astounding. In the face of the severe Asian financial crisis in 1997, China remained strong and maintained a high growth rate in the following years.

The continued economic growth has led to dramatic changes in peoples lives and consumer behaviour. With increasing Gross Domestic Product (GDP), the dominant income and peoples purchasing power are greater than ever. Higher purchasing power means people are more likely to pay for quality and expensive products. The mobile phone is an example. In addition, the first time buyer is rapidly increasing in China. Therefore, increasing economic
47

growth plays a key role in promoting the speedy development of Chinas mobile phone industry.

Table 2 Chinas Economic Growth, 1978-2005 Year 2005 2004 2003 2002 2001 2000 1999 % 10.2 10.1 10.0 9.1 8.3 8.4 7.6 Year 1998 1997 1996 1995 1994 1993 1992 % 7.8 9.3 10.0 10.9 13.1 14.0 14.2 Year 1991 1990 1989 1988 1987 1986 1985 % 9.2 3.8 4.1 11.3 11.6 8.8 13.5 Year 1984 1983 1982 1981 1980 1979 1978 % 15.2 10.9 9.1 5.2 7.8 7.6 11.7

Source: National Bureau of Statistics of China Website, 2008

4.3.2 Government Policies The governments presence in Chinas mobile phone market strongly effects and shapes the development of this industry (Nie and Zeng, 2003). The regulations and policies manipulate every movement and every action of key players in it. In the past, the mobile phone industry was regarded as a development priority and preferred by the Chinese government (Jin and Zedtwitz, 2008). The government supplied much support and domestic manufacturers were driven to invest in technology development to compete with leading foreign mobile phone manufacturers.

Furthermore, the states decisions can lead to a significant impact on the success or failure of a firm. For instance, the national technology
48

of telecommunication is decided by an authorised institution, the Ministry of Post and Telecommunications (MPT). Only the interior technologies of the products that are in accordance with the national standards can get access to the market (Nie and Zeng, 2003). Motorola suffered a great loss from the states adoption of GSM technology, the European technology, instead of CDMA technology, the American technology, in the transition from analogue to digital mobile communication technology in 1994 (Business China, 1998). During the following years, Motorola lost its leading market position. Nokia outstripped the big rival and increased its market share at the expense of Motorola.

However, the environment has improved and the governments attitude became neutral after some needed reforms were made by the state. In 1998, to promote open an environment and fair competition, the Chinese government established the Ministry of Information Industry (MII) as the administrative entity in charge of the information technology related industries. MII receives and carries on the affairs and business of many formal institutions; such as the Ministry of Post and Telecommunications (MPT), the Ministry of Electronic Industry (MEI), etc. Mobile phone manufacturing is also under the control of MII (Nie and Zeng, 2003). MII is in charge of the market through industry standards, regulation, and equipment inspection (Low, 2005). The institutions reforms have strong influence on the business practices in the mobile phone industry. In terms of foreign companies, for example, building a good relationship
49

with MPT and technology transfer is no longer a price for operating in China (Nie and Zeng, 2003).

On the other hand, the influence of the Chinese government on the mobile phone industry is getting looser as time goes on. After Chinas formal accession to the World Trade Organisation (WTO) in November 2001, mobile phone service became open to foreign investors and the tariff barriers and non-tariff barriers reduced. This opening of telecommunication services provides huge opportunities for

international mobile phone manufacturers and reduces the risks of doing business in China (Low, 2005). Moreover, it is expected to create more demand for mobile phone production and thus increase market competition (Nie and Zeng, 2003). With the open attitude towards telecommunication service market, the Chinese government issued more licenses to both domestic and foreign services providers (Nie and Zeng, 2003). This has benefited not only service suppliers but also manufacturers because the more service suppliers available, the more the demand for telecommunication equipment.

In summary, it can be seen that initially the state actively participates in and facilitates the development of the mobile phone industry. However, after a series of reforms and liberation, the government is gradually vacating the foreground and supporting the market economy from behind. The mobile phone industry grew under the control of the Chinese government; however, it still flourishes even as the government loosens its grip.
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4.3.3 Other Factors The favourable business and marketing environment in terms of the global, country, and local market levels can foster growth and the diffusion of the products (Kotler et al., 2005). With the liberation and deregulation of the mobile phone market and the rise in purchasing power resulting from continued economic growth and purchasing power, the approving environment drives the prosperity of the mobile phone industry.

However, there are still many other factors facilitating the growth of this industry. Competition between mobile telecommunications operators is also one of the major driving forces. Fierce competition between system suppliers has led to the reduction of mobile phone connection fees. Lower expenditure also promotes the dispersion of mobile phones (Zhang and Prybutok, 2005). On the other hand, the mobile phone now symbolises a personal lifestyle rather than a communication tool. The emerging technology enhances companies capabilities to incorporate new features in mobile phones to differentiate with other products to attract consumers and gain a market share in an almost mature market. This factor partly contributes the success of domestic manufacturers in Chinas mobile phone market. The speed of the introduction of new products rise represents the high competitive situation in this market. Therefore, the technological development and the intense competitive

environment also contribute to the penetration of the mobile phone.

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4.4 Characteristics of Chinas Mobile Phone Industry 4.4.1 Highly Technology Concentrated Developing and improving technical skills and knowledge to respond to the dynamic business environment are of vital importance to manufacturing companies in high-tech industries (Jin and Zedtwitz, 2008). The mobile phone industry is no exception. Technology plays an important role in the developing history of the mobile phone industry, especially from a strategic perspective. Furthermore, in the developing countries, governments stress the point in particular on the grounds of its strategic role in competitive advantage (Lall, 1990). The development and quick progress of underlying technologies in Chinas mobile phone manufacturing industry are mainly transferred or learned from foreign mobile phone manufacturers (Jin and Zedtwitz, 2008).

In the case of telecommunication systems, technology has made progress from 1G to 3G in nearly two decades, from analogue to digital technology. The first generation (1G) technology is Total Access Communication System (TACS), an analogue mobile phone

technology used at the start of mobile telecommunication in China. However, this only lasted from 1990 to 1997. Analogue technology comes to an end after the introduction of the second-generation (2G) technology, a digital technology. The 2G technology is the Global System for Mobile Communication (GSM) while the 2.5th generation (2.5G) is Code Division Multiple Access (CDMA) and General Packet Radio Service (GPRS). The latest is the third generation (3G) system,
52

a prevailing universal telecommunication standard, including CDMA 2000, Time Division-Synchronous Code Division Multiple Access (TD-SCDMA) and Wideband Code Division Multiple Access (WCDMA).

The significant advancement in this generation is that the bandwidth used is getting wider and the coding technique has improved with the successive three generations (Jin and Zedtwitz, 2008). In addition, the support of the Chinese government also facilitates the

development of technology. For example, the Chinese government urges investment in 3G technology and helps implement the TD-SCDMA standard in China (Jin and Zedtwitz, 2008). In addition, many mobile phone manufacturers are working on the development of core technologies for the fourth generation (4G) of mobile communications.

4.4.2 Intensive Competition In the beginning, the competition in Chinas mobile phone market was low, while the profit was high. Therefore, many mobile manufacturers were allured into this huge and undeveloped market. However, the competition between manufacturers is getting more and more intense. The number of mobile phone manufacturing companies in China soared rapidly from five in 1997 to 37 to over 200 manufacturing locations in 2004 (Jin and Zedtwitz, 2008). Not only the foreign companies but also domestic firms have entered this market in succession.

53

Even though internationally renowned manufacturers, such as Nokia, Motorola and Samsung mainly dominated the market, Chinas domestic manufacturers who at first struggled against them have gradually achieved a higher position in the market. Their market share has jumped from 0% before 1999 to more than 40% in 2004 (Jin and Zedtwitz, 2008). However, it is difficult for them to develop by themselves; they usually obtain technology through joint venture with multinational corporations (MNC) or introduce the production line from foreign manufacturers. The competitive nature of the mobile phone industry can be observed from the speedy updated

technologies, numerous new models and fashionable designs of mobile phones on the market.

4.5 Five Forces Analysis of Chinas Mobile Phone Industry The main players in the mobile phone industry consist of mobile equipment suppliers, manufacturers, and customers. The interplay between the players determines the overall threats of the industry and thus helps firm managers to select and implement strategies. The following section applies Porters five forces model to analyse Chinas mobile phone industry.

4.5.1 Threat of Entry The threat of entry is moderate in the mobile phone manufacturer industry. This is because some new barriers to entry have been introduced. Product differentiation plays a role in increasing the cost of entry while there are few international manufacturers with leading
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brands predominant in this market. Brands can be powerful while the customers lack the knowledge to differentiate the competing products or services. Customers prefer to choose products or services provided by the companies with good reputations because they believe in the quality behind the brands. This effect is parallel to the creation of monopoly power for these incumbent firms (Segal-Horn and Faulkner, 1999: 39). Government barriers to entry are in the form of the requirement of licenses. Mobile phone manufacturers are in want of licenses to produce and sell mobile phones in this market (Roseman, 2005). Obtaining a license requires meeting the regulations and standards of the MII, which is in charge of the business of telecommunications sector.

Production scale is another important issue in China (Chen, 2004). Many successful manufacturers decrease production costs by producing a huge amount of volume to reach economies of scale. On the other hand, relatively high capital requirement in developing new technologies claiming financial resources may limit the number of prospective entrants (Porter, 1979). Technological development can raise the level of fixed costs in the production process. However, despite these barriers, new firms can still enter this industry by outsourcing core technologies and product modules through joint venture or alliance, and exploiting firm resources. For example, many domestic mobile phone manufacturers successfully enter this market by means of their rich local knowledge, distribution channels, and knowledge gained in join venture.
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4.5.2 Threat of Rivalry The threat of rivalry is quiet high in the mobile phone industry. This is because there are numerous firms making and selling mobile phones in this market and the level of industry growth is declining. However, the number of mobile phone manufacturers is increasing. The market share of local makers increased from 5% in 1999 to almost 40% in 2003 (Bout et al, 2004). Furthermore, local vendors in China have taken away half of the Chinese market from foreign vendors (Ramstad, 2003). On the other hand, when an industry matures, its growth rate will fall and this leads to intense competition and lower profits (Porter, 1980). According to Figure 1, the growth rate of mobile phone users increasingly declining in recent years demonstrates that this industry has come to maturity. Firms in this industry fight for market share at the expense of other established companies. This may lead to fierce price competition when competitors aggressively pursue a greater market share.

On the other hand, the brand names of some incumbent companies can help ease the degree of rivalry to certain extent. However, the rapid duplication and imitation of new technologies in this industry not only diminishes the profit margin (Barney, 1986) but also represents a high level of rivalry. Moreover, with WTO accession, the reforms in telecommunications make the mobile phone market more competitive (Walmsley et al., 2006). All of these factors determine a high level of rivalry in the mobile phone industry.

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4.5.3 Threat of Substitutes Substitutes meet similar customers needs in different way. In other words, they provide different products with roughly the same functions to satisfy the customers. In terms of the mobile phone industry, the product has function beyond basic communication. Mobile phones are steadily becoming multifunctional now as more and more entertainment devices are integrated with them. Mobile games, digital cameras, mp3 players, and the Internet are integrated with mobile phones. The difference between mobile phones and music players as well as digital cameras is indistinct in customers minds.

However, at the broadest level, firms in the mobile phone industry are in the consumer electronic industry. Therefore, some forms of consumer electronic products, such as video game players, cameras, personal stereos, and hand held personal digital assistants (PDAs), are partial substitutes for mobile phones. On the other hand, recently, the products of international challengers, such as iPod and Blackberry, make the high price market more competitive. Therefore, the level of the threat from substitutes in this industry is considerable high.

4.5.4 Threat of Supplier A mobile phone consists of hundreds of components. The suppliers in this industry are chip makers, design firms, and distributors. Only a few of Chinas domestic manufacturers are able to design and produce mobile phone by themselves. Most of them are imported components from suppliers and other manufactures. For example, Motorola has
57

developed and sold mobile phone chips to six manufacturers in China (Ramstad, 2003). However, the threat of the supplier is not as high as expected because Chinas domestic firms purchase components from a wide range of suppliers (Ramstad, 2003).

On the other hand, the international giants have the technology to produce a part of a component in-house and purchase the rest from other suppliers. Their self-manufacture capability lowers the

bargaining power of the supplier and reduces the threat. Moreover, the customs tariffs of IT products were reduced after Chinas accession to the WTO (Groombridge, 2000). Hence the manufacturers can import components at a lower cost. For these reasons, since manufacturers can source raw materials or components from a wide range of suppliers, the threat of supplier is low in the mobile phone industry.

4.5.5 Threat of Buyers As mentioned before, the number of mobile phone manufacturers in this market is large. A wider spread telecommunications system in China facilitates the expansion of the mobile phone manufacturing market, and thus leads to a highly competitive market. The bargaining power gradually shifts to the buyer when the market becomes more competitive (Veliyath and Fitzgerald, 2000). Many companies are tending to adopt a consumer- oriented approach due to the high level of competition (Yun et al., 2003), and thus results in many choices in the market. The excess of supply over demand
58

enforces the bargaining power of buyers, and then increases the threat of the buyer.

In addition, customers can easily obtain abundant information in the market through advertisement, the internet, and brochures. They can also easily find alternative products in the same price segment with extremely low switching cost. With the giant bargaining power of buyers in the mobile phone industry, the threat from them is very great and their actions could decrease the revenue of a firm. Therefore, the manufacturing companies can only make marginal profits.

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Chapter 5: Case Studies: Motorola and Samsung

5.1 Company Background 5.1.1 Motorola, Inc Motorolas success is rooted in the companys years of research and experience since it was built as the Galvin Manufacturing Corporation in Chicago in 1928 (Motorola, Inc., 2008). As the pioneer in the communications world, Motorola produced the worlds first

commercial portable cellular phone in 1983 and changed the way people communicate. It is the largest US mobile phone producer and is listed in the world top 100 enterprises. In the global market, it provides products and services through the whole world and is one of the five largest mobile phone manufacturers world-wide. With a long history in telecommunication and a good reputation, it is located as an industry leader and its global market share is dominant.

The companys business consists of three dimensions: network and enterprise, mobile devices, connected home solutions (Datamonitor, 2008a). And its business domain covers the US, the UK, Germany, China, Israel, Singapore, etc. In terms of mobile devices, the company designs, produces, and sells mobile phones as well as the accessory equipment. Moreover, it licenses intellectual property and sells technology. China Mobile and T-Mobile are two of its customers (Datamonitor, 2008a). Mobile phones are mainly produced in Asia, and China is one of the largest manufacturing bases.

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Motorola entered China in 1987 (Motorola, Inc., 2008). As the first international mobile phone manufacturer invading the market, Motorola has more resources and knowledge than other companies in China. It has built a sales and service network throughout the country. Because of its brand, Motorola successfully attracted many customers in the short term and occupied a dominant market share in China.

At present, Motorola has five joint ventures and built a holding company in 1998 to co-ordinate and manage business operations in China (Datamonitor, 2008a). Their staff in China is over 3000 people and the sales and services chain has penetrated through urban areas. With a long history of doing business in China, it has accumulated abundant local knowledge and experience related to management and investment, and established resources networks and channels. With regard to the bottom line, the contribution of China is only ranked behind the US and has become the companys second largest market. The revenue in the fiscal year 2006 is $42,879 million, an increase by 21.6% in comparison with 2005. 10.9 % of their total revenue in 2006 is attributed to China. The revenue from China in 2006 is climbed up to $4,664 million, with an increase by 60.4% compared to 2005 (Datamonitor, 2008a).

5.1.2 Samsung Electronics Samsung Electronics was established in 1969 and is presently one of the leading consumer electronics and telecommunications equipment manufacturers (Samsung, 2008). As one part of the Samsung Group,
61

Samsung Electronics serves as the groups future growth engine. It operates its business through a number of subsidiaries worldwide with more than 90 offices in 48 nations (Datamonitor, 2008b).

It carved out its business by manufacturing televisions and other home appliances, such as washing machines and refrigerators. In the 1980s, they started to engage in producing semiconductors, telecommunication devices and systems. Initially, their products are of inferior quality and considered reliable by customers. Consumers regard their products as the cheap alternative products to the superior Japanese made products (Lee and Lee, 2004). Today, it is a leading brand of manufacturing semiconductors in the world and its success in the semiconductor business facilitated the development of the company. However, they gradually shifted attention to LCD (Liquid Crystal Display) business and mobile phone business and still propose to expand their business domain (Lee and Lee, 2004).

With the headquarters in Seoul, South Korea, Samsung mainly operates in Asia, Europe and the United States. Its business involves five major divisions: semiconductors, LCDs, Telecommunication Networks (mobile phones and telecommunication systems), Digital Appliances and Digital Media (Samsung Electronics Annual Report, 2006). Each business unit is not only responsible for its own performance but is also associated with each of the others for the sake of pursuing the companys vision of digital convergence (Samsung, 2008). Samsung exploits the advanced technology
62

available and offers innovative and distinctive products to generate values for its brand.

Samsung commenced its mobile phone business in 1983 (Lee and Lee, 2004). They experienced many difficulties at the initial stage due to the lack of advanced technology and brand identity. However, after a series of restructuring initiatives, quality management improvement, and brand-building advertisements, the situation has been

transformed. Samsung is the worlds third largest mobile phone manufacturer and the worlds largest producer of CDMA mobile phones (Datamonitor, 2008b).

5.2 Firm Resources Motorola and Samsung have parallel firm resources that are essential for the two companies to compete in Chinas mobile phone industry. Both of them capitalise on the strength of their superior research and development ability and brand reputation in the highly competitive market.

5.2.1 Technology As a technology-oriented industry, technology plays an important role in Chinas mobile phone industry. Owning advanced technology implies success in the market. It is difficult to be the market leader without leading technology. On the other hand, the inherent nature of the mobile phone industry creates opportunities for latecomers with advanced technology to surpass the incumbents. Samsung followed
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the steps of Motorola and made technology progress in this business, thus successfully going forward to a leading position.

Motorola has been in the proactive position in technology for a long time. Their profound technological ability has accumulated and developed throughout its history. Having high quality and being technology-oriented is deeply embodied in the minds of its customers. Conversely, Samsung did not commence its mobile

telecommunication business until 1983. Due to a lack of experience and core technology, the quality was so poor that there were many complaints from customers. Interestingly, in order to catch up with the market leaders and produce products comparable to Motorola, Samsung learned from the models of the Japanese-made mobile phone and introduced Motorolas mobile phone models as

benchmarking (Lee and Lee, 2004).

Since they lacked core competence, Samsung entered China by means of their strong design capability. Initially western

manufactures provided simple and straightforward designs which are popular in their home countries (Bout et al., 2004). However, mobile phones are increasingly becoming fashion accessories rather than communications tools (Srivastava, 2005) and the personalisation of the mobile phone has become highly required by individual consumers. This gave Samsung an opportunity to meet this niche market. Samsung responded to this trend and offered a wide array of mobile phones with different coloured covers and designs to fit the
64

users tastes. Their successful expansion in China was mainly driven by superior product designs, one type of non-core technology.

Non-core technology refers to technology that can create value for customers in line with their needs, such as the design capability. In contrast, owning core technology means the company has the ability to produce the key components of mobile phones, such as mobile phone chipsets and software. In order to catch up with the trend, Motorola has designed the clamshell mobile phones and the introduction of its new innovative RAZA and SLVA models that have kept Motorolas place among the market leaders (Motorola, Inc., 2008).

The development of the mobile phone industry goes hand in hand with advanced technological development. In order to tailor products to the users and environment in China, as well as maintaining their competitiveness among rivals, both of them have set up local R&D centres and invest heavily in R&D activities in China. This also shows their long-term commitment to China. The overseas R&D centre can serve as a location to modify products and technologies for domestic needs in the global network of a multinational corporation (Li and Yue, 2005). It is beneficial to adopt products into local market conditions, lifestyles, and culture.

Motorola has founded several research centres and laboratories in China. The Motorola China Research and Development Institute was
65

set up in Beijing in November 1991 aiming at facilitating the technology innovation and development (Li and Yue, 2005) and it located their new R&D complex in Wangjing, Beijing in 2007 (Deffree, 2007). The money invested in its 18 R&D centres in China is as much as218 million and employed researchers number more than 1000 people (Li and Yue, 2005). Comparatively, Samsung spends at least 9 percent of its annual revenue in R&D development every year (Lee and Lee, 2004). The employees committed to R&D activities number 36,000 and account for 26% of its entire workforce around the world. In addition, Samsungs massive investment in R&D was ranked 9th by Financial Times in 2006 among 1,250 companies in the world (Samsung Electronics Annual Report, 2006).

The support of the Chinese government also contributes to active R&D operations of foreign companies (Li and Yue, 2005) as access to foreign technology is still a priority of their policy (Low, 2005).

5.2.2 Brand Reputation High brand identity is also essential in the competitive market. Both Motorola and Samsung have brand superiority, which is an efficient tool in the competitive mobile phone market. However, their predominant brand identities developed in different ways.

Brand created values form the process by which consumers recognise the brand and shape their preferences (Carpenter and Nakamoto, 1989). Brand identity can be created through the development of
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history. The Motorola brand is rooted in its long history of communication and electronics industry innovation (Motorola Inc., 2008), which is embodied in its unique path through business history. According to Barney (1991), if valuable and rare resources are born from and rely heavily on its unique historical events, it is difficult for other firms to duplicate this and they can be a source of competitive advantages. As a global leader, Motorola believes that their brand reputation is shaped by continuous excellent innovation (Motorola Inc., 2008). Moreover, in the mind of the consumer, the image of Motorola is technology-oriented and high quality. The value of the Motorola brand is deeply based on its rich experience in

communication inventions and innovations since 1928.

In contrast, the brand reputation of Samsung is not grounded in its history. Brand identity can be formed not only from history but also by skilful and heavy advertising, and Samsung embodies the latter. In the past, the image of Samsung was low price and low quality. In order to change this prejudice, Samsung concentrated on providing products with additional value and tried to create an image of leading the digital revolution (Samsung, 2008). In 1993, in Frankfurt, Samsung declared a new management programme-Samsung New Management, which disclosed their determination in quality

improvement and change (Lee and Lee, 2004). Samsung chose the European and North America markets as the first market to build its new digital and fashion image and spread its brand to the world.

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In China, Samsung continues using this strategy, and aiming at the high-end market because it believes that a high price means high quality and that it will result in more profits. Today, a mobile phone is not only a tool for communication, but also a symbol of status. Samsungs mobile phones are regarded as a symbol of wealth and social position in China (Samsung, 2008) and consumers are willing to pay more for the products with a brand. After the problems over quality, an aggressive marketing campaign was inevitable. Consumer loyalty can not be sustained without a strong brand identity. Samsung made efforts at brand-building and introduced products with new designs and improved quality aiming at transforming customers negative impression of Samsungs mobile phones and rebuilding their trust (Lee and Lee, 2004). After a series of extensive marketing efforts, Samsung successfully enhanced brand popularity and firmly connected the Samsung brand with quality, fashion design, and reliability. Moreover, design and innovation are the philosophy of Samsung and these become its core of corporate competitiveness (Samsung Electronics Annual Report, 2006).

Both Motorola and Samsung have established their brands around the world. In BusinessWeek/Interbrands annual ranking of the best global brands, the rankings of Motorola and Samsung have increasingly improved. In the electronics category, Samsung

surpasses its rivals and stands in the leading position. As shown in Table 3, the ranking of Samsung has climbed from 25 in 2003 to 20 in 2006 and the value of its brand is 10.85 billion and 16.17 billion
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respectively. Motorola is inferior to Samsung by comparison. However, its ranking has steadily ascended from 81 in 2003 to 69 in 2006 and the value of the brand has increased by 1.47 billion during this period.

Table 3 Best Global Brands, 2003-2006 2006 billion ranking value 2005 ranking Value 2004 ranking value 2003 ranking value 10.85 3.10

Samsung 20 Motorola 69

16.17 20 4.57 73

14.96 21 3.88 76

12.55 25 3.48 81

Source: Business Week

5.3 First-Mover: Motorola 5.3.1 Discover the Opportunity In the case of the mobile phone industry, as the US and European markets are saturated, it is essential for global manufacturers to expand their businesses to emerging markets. China offers great market potential due to its very large population. A market presence in China is a necessity. Motorola had insight into this opportunity and entered China in 1987 as a pioneer. This kind of insight can be regarded as a unique firm resource that enables a company to implement a strategy before other competing firms (Lieberman and Montgomery, 1988). Prior to the 1980s, telecommunication

equipment and technology in China were relatively weak. Motorola saw the potential market, decided to enter China, and carried out a long-term investment in it after they heard about Chinas

69

announcement of economic reforms (Freeman et al., 2003).

5.3.2 100 Percent Control in the Chinese Operations Investing in China is difficult and problematic due to its

state-controlled economy. The Chinese government only allowed foreign investors to have a joint venture with local firms and hold minor shares within the joint venture in the 1980s. However, the CEO of Motorola insisted on wholly owning direct investment and proposed a 100 million investment in China as a price for full control (Freeman et al., 2003). The Chinese government agreed this claim due to its incentives to promote the development of telecommunications. Therefore, Motorola built the only wholly owned production facility in Tianjin and planted their feet sturdily in China prior to competing firms.

5.3.3 Long-term Investment Since Motorola commenced their business in China in 1980s, they regarded their operation in China as a long-term. Hence, their strategy in China is to establish local networks and lay a foundation rather than exploit its cheap labour force (Freeman et al., 2003). They deemed China more than an attractive site for manufacture even though their largest manufacturing facilities were already located there (Motorola Annual Report, 2007). Motorola built R&D facilities and employed local researchers to meet local needs as well as to establish their operation network. By 2006. Motorola employed more than 3,000 R&D researchers and their investment in R&D was up to
70

800 billion. Their R&D centres and labs have been widely located in Beijing, Tianjin, Shanghai, Nanjing, Chengdu, and Hangzhou (Deffree, 2007).

5.3.4 Maintain Guanxi Investing in China might be risky and have a great deal of uncertainty because operations in China can be negatively affected by unexpected changes to regulations or laws. Therefore, acquiring the latest information and making tactics to respond to the changes in advance are important. In order to smooth the operation in China, it is necessary to maintain guanxi with the Chinese government as well as with local business partners. Guanxi centres on personal relationships and is permeated through Chinese society. It also plays an important role in business in China. Foreign firms are always in a disadvantageous position in comparison with the local firms due to the lack of guanxi (Leung et al., 1996). The social network may enable a firm get access to key resources.

Motorola recognised this point and committed themselves to establishing and building their own guanxi networks to deal with this problem (Freeman et al., 2003). Motorola executives travel regularly to China to meet Chinese officials in order to maintain good relationships with them (Einhorn, 2003). It was verified that the dominant success of Motorola during the early 1990s was partly ascribed to their firm relationship with the Chinese government and MPT (Low, 2005).
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5.4 Follower: Samsung Samsungs success in China attributes to its duplication of successful experiences in Korea. As a group business, Samsung has accumulated specific resources through sequential entry into different industries. The following section emphasises the role of project execution capabilities and vertical integration and regards them as the source of core competence for Samsung, in spite of its late entry.

5.4.1 A Business Group China was only regarded as the manufacturing site by Korean firms when they started to engage in FDI in China in the late 1980s (Kim et al., 2004). During the first stage of Korean FDI in China, the main players were small and medium enterprises (SMEs). However, as the Chinese economy grew rapidly and constantly, the Korean firms started to view China from a different perspective. They changed their viewpoint of China from a production base to a strategic market. The main participants at the second stage since the mid 1990s of Korean FDI in China are business conglomerates, which are called chaebols in Korea (Kim et al., 2004). Samsung is one of the business groups emerging during this period and has made an astonishing

performance in spite of its late entry to China in comparison with other multinational companies.

With support from the Korean government, Samsung had the opportunity to emerge as a chaebol. In order to facilitate the economic development in Korea, the Korean government decided to
72

concentrate government

the

limited

resources

on

certain and the

industries. latest

The

offered

favourable

funds

foreign

technology to those firms who engaged in the strategic sectors indicated by the government (Kim et al., 2004). Samsung diversified its business into those strategic sectors to respond to the governments initiatives, to expand its business domain, to

accumulate experiences and become a chaebol.

Samsungs business portfolio is diverse, including semi-conductors, telecommunications, electronics, IC chips, steel, chemicals and financial services (Samsung, 2008). Through diversification,

Samsung are able to learn and accumulate project execution capability which is developed from the large number of related and unrelated business areas they have entered into (Lee and He, 2006).

5.4.2 Project Execution Ability Initially, the appearance of business groups was considered to be a response to the imperfect developments in labour, capital, and product markets (Leff, 1978). Afterwards, business groups were regarded as the solutions to the market failure. In many studies, the capability of diversified business groups to share their resources within the group to compensate for the faults resulting from a poorly developed external market is considered a source of competitive advantage (Ghemawat and Khanna, 1998; Guilln, 2000). In other words, the ability of a business group to share and transfer critical resources in the whole organisation may be considered competitive
73

advantages. On the other hand, since a firm is a bundle of resources, in the resource-based view (Barney, 1991), the firms performance also depends on how much of the diversified resources it possesses. The group style organisation feature provides reciprocal support between different product lines and contributes to the success of Samsung in China.

Firms generate heterogeneous resources through their specific pattern of development over time. Samsung accumulates the project execution capability though entering diverse industries and countries and undertaking different programmes. The value of the project execution ability is generated through learning by doing. Moreover, the level of knowledge acquired via project execution depends on the number of projects carried out by the firm (Amsden and Hikino, 1994). Project execution capability consists of the skills required to establish or expand operating and other corporate facilities, including undertaking pre-investment feasibility studies, project management, project engineering, procurement, construction and the start-up of operations (Lee and Kim, 2004:13).

Samsung started its business with labour-intensive industries and then expanded its business areas to capital-intensive and service industries (Lee, and Lee, 2004). In addition, it replicated the successful model in Korea to overseas countries. According to Guilln (2000:362), the ability of business groups in entering diverse industries can be maintained as a valuable, rare, and inimitable skill
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only as long as asymmetric foreign trade and investment conditions prevail. In the face of the vast entry barriers made by incumbent firms in terms of the intensive technology and the unfavourable business environment in Chinas mobile phone industry,

diversification of the business area opens the door to Samsung to compete with these incumbent firms.

5.4.3 Vertical Integration Samsung developed the ability of vertical integration in the process of establishing an empire in Korean during the early 1970s and utilised this experience to replicate another corporate empire in China. The Samsung Group started setting up Hong Kong Samsung Trading Company in 1975. The Samsung Corporation located its office named Hong Kong Sungjin Company in Beijing in 1985 and in Shanghai in 1990. Moreover, there are many small wholly-owned investments, such as the DESM (Dongguan Samsung Electro-Mechanics) set up in 1990 and the Samsung Corning in Tianjin (Lee and He, 2006). These leading investments helped collect information and knowledge and pave the way for further large investments in China.

Samsungs project execution capabilities led to further co-ordination between diverse business lines and vertical integration among affiliates. Samsung took the advantage of resource sharing and knowledge transfer among affiliates to overcome disadvantages of late entry into China. Samsung Groups formed a network of resources sharing through four chief affiliates, SEC (Samsung Electronics
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Company),

SC

(Samsung

Corning),

SEM

(Samsung

Electro-Mechanics), and SDI (Samsung DI), in China since the 1990s and choose Tianjin, Suzhou, and Dongguan-Shenzen as its business bases (Lee and He, 2006). A series of successive entries of related electronic affiliates in China produced synergy effects that resulted from vertical integration among affiliates. The ability to extract synergy effects from affiliates is difficult to imitate and thus, can contribute to a competitive advantage (Barney, 1991; Guilln, 2000).

Even though the pioneers in Chinas mobile phone industry, such as Motorola, are able to pre-empt the scarce resources and occupy the key suppliers and distributors. Late entrants can draw level with the first-movers by destroying the current rules (Cho et al., 1998). Since it is difficult for Samsung to snatch pre-emption from the pioneers, the company gave up the me-too strategies and built its own new rules. It established its own network via vertical integration. SEC entered China with the advantage of a network of resource sharing. With the stable and efficient supply of core components from SEM, SDI and SC, SEC could reduce the risk of an insufficient supply of key components.

Moreover,

given

the

family-owned

characteristic,

the

strong

leadership and entrepreneurial spirit of the founders also led to the success of Samsung. The Samsung group set up its headquarters in 1959 (Kim et al., 2004), known as its Secretarial Office, to collaborate the resources between affiliates.
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With

the

central

control

headquarters and a stable supply of components, Samsung could exploit the emerging opportunities rapidly. Given the short life cycle of mobile phones, Samsungs ability to develop products in response to the changing market demands in time is critical to its success in China.

5.5 Discussion Motorola had the insight into the opportunities in Chinas mobile phone industry, and implemented a strategy into this market as the first-mover. This insight is considered a unique resource enabling Motorola to capture the potential market before other rivals.

Being the first-mover, Motorola gained advantage through its leadership in technology. With a long history in telecommunications, the technology and quality of its products are reliable. According to the learning curve, costs fall with increased output. Motorola acquired the cost advantage because it occupied the majority market share in China in the early 1990s. Even though Motorola is adept at R&D and engaged in the standardisation of its CDMA model, it lost its leading position for several reasons. Motorola adopted cut-throat pricing in order to enlarge its market share and provided technology share in return for the introduction of CDMA into China (Business China, 1998). In addition, another competing standard, GSM, appeared in China and made the market more competitive. The possibility for first-movers to gain advantages through R&D is on the basis of the inability for followers to imitate or duplicate it (Lieberman and Montgomery,
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1988).

It seems that Motorola paid a high technology transfer price to pierce the market making it less costly to imitate its technological capability. Moreover, patents are of little value in China as the rapid duplication and imitation of new technologies in this industry diminish Motorolas profit. Therefore, its core competency of R&D is not as imperfectly imitable as before and can not be a source of competitive advantage. Moreover, as Motorolas market share declines, the learning curve advantages are also reduced.

At the time of entry, Samsungs technological ability in mobile phone manufacturing fell significantly behind Motorola. However, Motorola was not able to notice the shift in the market and the changing taste of Chinese customers. It did not realise that with increasing economic development in China, the purchasing power of Chinese people would also rise. Motorola engages in pursuing the low-end market and aims at recapturing its market share from the late entrants. Conversely, Samsung is working hard to get rid of its low-end image and rebuild a premium image of luxury goods (Lee and Lee, 2004). Samsung noticed the niche market of high-end customers and successfully usurped Motorola to become the top manufacturer in the CDMA market in China, raising its sales in the GSM market by means of luxury and quality products. On the other hand, the centre of competition has shifted to design and functionality. Samsung provides various products with unique designs to fill different customer needs.
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Moreover, it embodies design in its brand in order to create a new image (Samsung, 2008). It is shown that innovative late entrants may be more profitable than early entrants (Shankar et al., 1998) and that Samsungs design and innovation capabilities also contribute to its success in China.

Motorola realised the importance of guanxi and maintained good ties with the government at the time of entry. They built their own guanxi network to smooth business operation in China. Due to its late entry, Samsung was unable to have joint ventures with strong domestic firms. The rest of the local firms, those not selected by early entrants, are the main partners in Samsungs joint ventures. However, Samsung is very popular with the Chinese because they offer new technology transfer and facilitate industrial development in China (Lee and He, 2006). Even though Motorola took advantage of having good ties with the Chinese government in the early 1990s, this kind of resource can be substituted and is not costly to imitate as the market evolves. Samsung could also achieve a similar effect and were welcomed by the Chinese government as they became more open to foreign investments. In addition, with the institutional reforms, maintaining links with official institutions, such as MPT, is no longer essential to mobile phone manufacturers in China (Nie and Zeng, 2003).

It is has been shown that consumers have favourable impressions towards pioneering brands ,and incumbent brands are more likely to
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be put under consideration and purchased when customers are shopping (Alpert and Kamins, 1995). The pre-emption of customer perception creates value for first-movers and can be regarded as a source of first-mover advantages. The behaviour of consumers evolves in favour with the pioneer brands (Lieberman and

Montgomery, 1998). In other words, the process of learning about the pioneer brands by customers helps constitute a preference for them and thus increases first-mover advantages (Carpenter and Nakamoto, 1989).

Moreover, buyers generate switching costs in the process of using the first-movers products (Lieberman and Montgomery, 1998). If the switching costs are high enough, it may deter the buyers from using followers products. Therefore, the order of buyers learning about brands is influential and it seems prior entry is of great help and can generate first-mover advantages. Due to the long history of telecommunication and the long period of operation in China, customers thought of Motorola when they thought of mobile phones. Motorola occupied the majority of the market share at the initial stage of its entry.

However, the advantage did not last long as Samsung invested additional resources to draw the attention of customers. Samsung engaged in improving the quality and image of its products. The me-too strategy is not appropriate for late entrants (Carpenter and Nakamoto, 1990), or in other words, it is fruitless for late entrants to
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position themselves close to the pioneers. Hence, Samsung tried to transform its image to a combination of innovation, design, luxury, quality and high-tech to differentiate with other competitors. The strategy was effective and Samsung successfully rebuilt its image via an extensive investment in marketing and advertising. Samsungs fashion image is opposite to the serious image of Motorola (Simpson, 2005). In addition, the switching costs became lower in Chinas mobile phone industry because buyers came to have abundant information and found it easy to acquire alternative products in the market, thus decreasing the first-movers advantage.

The success of Samsungs global branding strategies is grounded on its co-ordination within the business group (Lee and Lee, 2004). As a business group, Samsung is able to concentrate its marketing resources to the mobile phone business. The project execution capability is accumulated through entry into diversified industries and countries. Moreover, it duplicated its experience in Korea and established the same network of vertical integration via a series of entries of linked electronic affiliates in China. The early entry of group affiliates can help collect information and investigate the market. The group-wide governance enables Samsung to co-ordinate and share its resources to achieve objectives.

Samsungs project capability and the ability to produce synergy from vertical integration of affiliates are tied up closely with its history of emerging as a business group. It cultivated these unique resources in
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its specific historical conditions, this is difficult to imitate and can be regarded as a source of competitive advantage. Except for Samsungs capabilities on R&D, marketing, and innovation, which are essential to success in the mobile phone industry, Samsungs success in overleaping Motorola in China is mostly determined by its capabilities of resource sharing and integration across the business group.

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Chapter 6: Conclusion
6.1 Findings and Implications This study has reviewed the literature on the resource-based view, examined the first-mover advantages under this theory and applied Porters five forces model to Chinas mobile phone industry. In addition, it has introduced the possible first-mover advantages and illustrated how the late entrant can implement its firm resources and exploit the market opportunities to compete successfully or even overtake the early entrant by using a case study in Chinas mobile phone industry. In this research, it is found that pioneering firms may be able to enjoy significant first-mover advantages and gain significant profits. The first-mover advantage might be a source of competitive advantage as long as the resource is heterogeneous with others. However, as the environment changes and time goes by, there is no guarantee that the potential first-mover advantages can be maintained and still ensure a strong position for the pioneer. If the early entrants can not prevent resources from being imitated or substituted or develop new resources in response to the changing environment, it is possible for the late entrants with more critical resources to outplay them and usurp their leading positions. Therefore, it is found that firm resource portfolio may change over time as the competition increases in this market.

In the case study of Motorola and Samsung, the researcher has discussed the resources Motorola brings to China and the resources

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accumulated due to its early entry. Motorola entered this market with its technological ability, established its business networks and pre-empted customers perception with its brand name. However, as the market evolved over time, Samsung was able to create new resources that could produce similar functions to compete with Motorola. Samsung rebuilt its brand image associated with high technology, innovation, and design by utilising its marketing capability to attract customers from other rivals. As a business group, Samsung can co-ordinate and share the resources among affiliates in the group, thus SEC can take advantage from the vertical integration and maintain stable component sourcing from other electronic affiliates and produce new products to respond to customer needs quickly. The prior capabilities of business groups in project execution capability and vertical integration are difficult to imitate, and thus can be a source of competitive advantage. The case of Samsung illustrates how a late entrant can identify and exploit its internal strengths and form competitive advantages.

In summary, the sustainability of first-mover advantages depends on many factors. It depends on the resources pre-empted by the first mover at the initial stage and the ability of the pioneer to accumulate and develop resources to respond the changing environment. The resource portfolio of a firm may change as time goes by. Furthermore, the resources possessed by the followers can not be disregarded. On the other hand, in a dynamic environment or in a transitional economy, there might be more space and opportunities available for subsequent
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entrants. As the market is growing, new niches appear and can be filled by late entrants and China is a case in point. Pioneers enjoy the benefits of early entry before the entrance of other rivals. However, the advantages may perish or vanish over time and can be destroyed by marketing and advertising (Lieberman and Montgomery, 1998). The case study supports this argument. The success of Samsung is partly attributed to its strong marketing capability that rebuilt its brand image of innovation and weakened the irreplaceable brand name of Motorola.

In conclusion, the first-mover advantage is hard to sustain as the market changes. The emerging market provides more space and opportunities to the sequential entrants. In other words, first-movers are not definitely stronger than late entrants. The late entrants may surpass the pioneers by exploiting their own resources portfolio or capabilities as long as they can perceive the niche market and fill it.

6.2 Contribution of this Study This purpose of this dissertation is to examine the existence and value of first-mover advantage and explore whether the late entrants can compete or even leapfrog the early entrants who might have pre-empted abundant resources because of their early entry. Much of the research concerns the United States; therefore, this dissertation selected China, and a highly competitive and flourishing industry within it, the mobile phone industry, as the research subject. The study examined first-mover advantages in this industry and
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concluded that it is possible for sequential entrants to surpass the pioneering firms by implementing their own specific firm resources. However, the prerequisite is that those firm resources are needed to be of value, rare, imperfectly imitable, and not equivalently substitutable. By using the resource-based view, the research explicitly discloses the differences between early and late entrants in terms of their resources and makes it easier to compare them.

This article may be of interest to companies intending to expand their business into new markets, especially developing countries in which there are more growth opportunities for new entries. In addition, because many companies who are eager to enter China now have to face up to the fact of being latecomers, the perspective on China might be valuable to them. On the other hand, it might be helpful to the early entrants who have cultivated their operations for a longer period before the entry of competitors. The study may remind them that in spite of their prior position and the first-mover advantages in the host country, it is possible that they can suffer severely from the appearance of late entrants. In addition, it provides a real case to demonstrate the power of firm resources and alerts to the dangers of being content within leading status and unwilling to change.

6.3 Limitations and Future Research Direction Limitation This dissertation focuses on the mobile phone industry in China and demonstrates the first-mover advantages within the industry. In
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addition, it also finds that a latecomer can exploit distinctive resources and capabilities to overtake the pioneers. However, the findings may be influenced by the selection of the industry. Some industries may have stronger first-mover advantages whereas the first-mover effect may be less significant in other industries. In other words, the result may show bias towards the mobile phone industry, because different industries have different features. Furthermore, sample selection within an industry may affect the result. Selectivity bias is common in industry studies (Kerin et al, 1992). A single-industry study may not be representative of general situations.

National differences are substantial. Since the study focuses on China, the consequences may not be the case in other countries. China is one of the worlds most powerful emerging economies. Its dynamic environment surely affects the process of resource accumulation and the evolution of firm strategies. If the study concentrated on a developed country with a more stable business environment, the result might have been totally different. Moreover, companies may have different perceptions of first-mover advantages when operating in different countries (Song and Di Benedetto, 1996).

Further research As this dissertation is based on two cases in Chinas mobile phone industry, the level of generalisation of the research results is limited. With regard to the future, similar research could be conducted in
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other countries, either developed or developing countries, to generate a more general conclusion. The accumulation of research in many individual industries may help clarify the first-mover advantages.

Moreover, the first-mover advantages are likely to be influenced by the features of emerging national markets (Nakata and Sivakumar, 1997) and it is found that there are significant first-mover advantages in China (Luo and Peng, 1999). It may be valuable to explore why the first-mover advantages are more significant in some industries and countries than in others, by integrating the first-mover advantage concept with the resource-based view of the company. In addition, the influence of market institutions in China are not discussed in detail in this study, it may be worthy to examine how firm resources evolve over time, as the market institutions change.

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