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Strategic Environments and Competitive Advantage by services. The vast majority of the labour force in developed economies is employed in services, largely because a rising proportion of income in these countries is spent on the products of this sector. An increasing proportion of services are being traded, and traded at the global level. The share of exports consisting of services such as education, health, tourism, entertainment, travel, nancial services and consulting is rising all the time.

The services package

Another aspect relates to the rising importance of services as part of the products produced, packaged and sold from manufacturing or agriculture. Service inputs are a vital part of product differentiation. For example, less than 10% of the price of most food products is accounted for by on-farm production costs. The other 90% consists mostly of the services needed to get the product to the consumer in a form which is desired. Services are linked to the physical products in ways which enhance their attractiveness. They are critical to the whole process of product differentiation. Since they are so important, the improved delivery of service inputs is also a vital part of cost reduction for all sectors of the economy. The communications revolution has allowed an enormous increase in productivity and reduction in costs to occur in the service sector and the inuence of that reduction to spread to all industries. There is now an ongoing process of cost reduction which is sweeping through every part of the services sector, including banking, insurance, health, education and all government services. Some of these industries are shedding labour at a rapid rate or expanding signicantly without adding to their labour force. The revolution is having a profound effect on the organization of production and selling. It cannot be ignored.

Case Study Hutchison and the introduction of third generation wireless communication
Hutchison has pushed through a movement to the new generation of wireless communication. In order to understand the implications of this, it is necessary to review the development of the technology. The technology 1G (rst generation) This was the beginning of wireless communication. The rst truly mobile phone system came into being between the late 1970s and early 1990s. In Australia, for example, the analogue mobile phone system was rst introduced in 1987. At rst the mobile or cellphone was known as the cellular mobile radio telephone (see the case study on Nokia in Chapter 16 for comments on its early history). The voice signalling system was entirely analogue, that is, it sought to reproduce the frequency of the voice with all its modulations. 2G (second generation) The second generation began in the early 1990s. This is the period of sustained takeoff in wireless communication. The introduction of digital voice encoding began. For the rst time the networks allowed data services in Australia in 1991. Much of the technology in use today is second generation technology. There is a 2.5 generation, a stretched version of the second generation. 3G (third generation) The main distinguishing feature of the different generations is speed of data transmission. This determines what can be transmitted. The International Telecommunications Union denes 3G by two speed requirements data transmission speeds of at least 144 kilobits (thousand bits) per second in wide area mobile environments, and 2 megabits (million bits) per second inside build-

8 Creating and maintaining competitive advantage

ings. Only W-CDMA and CDMA2000 1EV-DO satisfy these requirements. This generation has barely begun. Technology has become fully digitalized and makes full use of available bandwidth, signicantly broader than in earlier generations. The technology can be used in personal and business communication. It is available in all popular modes, such as mobile phone, email, paging, fax, video conferencing and Web browsing. There is a facility for enhanced multimedia communication. During the second and third generations, the technology applied was initially CDMA (code-division multiple access), the protocol most popular in the Americas, South Korea and Japan. The protocol allows numerous signals to occupy a simple transmission channel, optimising the use of available bandwidth. An alternative is global system for mobile communications (GSM), which has an estimated 825 million users worldwide, the most popular system, one used by most operators in Europe and Asia. W-CDMA (wideband CDMA) is currently the core technology of the third generation. It offers much higher data speeds to wireless devices than previously or commonly provided for. It greatly increases the potential range of possible applications. A substitute which does not generally fully satisfy the requirements of 3G is CDMA2000. General packet radio service (GPRS) is an upgrade of GSM. A further upgrade is EDGE (enhanced data rates for GSM evolution). For 2G GSM had speeds of 9.6 Kbps, and CDMA 14 Kbps. For 2.5G the GPRS upgrade of GSM has speeds of about 40 Kbps although in theory it could extend up to 170 Kbps. EDGE offers up to 437 Kbps in theory, but in practice closer to 100120 Kbps. The CDMA2000 1XRTT sometimes operates at about 70 Kbps, with usual speeds of 144 Kbps, although in theory it could reach 307 Kbps. For data alone CDMA2000 1XEV-DO offers 2.4 Mbps, and a further version, not yet operating, CDMA2000 1XEV-DV, offers both voice and data. In view of the high licence fees for the use of third generation wireless it is not surprising that one of the licence holders has decided to go ahead with the development of the technology, seeking rst-mover advantage. It was a matter of which player would take the lead in doing this. Given the circumstances of the market, it is unlikely that other players will quickly imitate. First-mover advantage Hutchison is taking a signicant risk in introducing the third generation wireless technology, committing a high level of resources to this project. It is likely that in the short run its competitors will simply observe how Hutchison is doing. Whether this investment is justied

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depends on working out the relative advantages and disadvantages of being a rst mover, and the speed with which others can respond if it proves a success. The advantages of being the rst mover are that the rst mover: establishes an important, if not the, brand name in the new area. In an extreme case the particular product becomes synonymous with the technology. Hutchisons use of 3 as its brand name emphasizes the generational leap. However, this primacy can backre if the teething problems of a new product undermine the good name of the pioneer seller. There are many possible teething problems, as shown below. Hutchison needs to establish itself not only as an innovative pioneer, but as one which is a reliable and relatively cheap provider of a new consumer product develops considerable expertise both in the new technology and in the bundling of consumer services and product attributes in a process of learning by doing plays an important role in setting the commonly accepted standards for the new technology. There are offsetting disadvantages, which are that the rst mover: has to take a wager on which new standard will emerge as victor bears the costs of technical development as well as the investment required in setting up a new network. It is estimated that, including the cost of the licence, it costs 50% more to build a 3G network than a traditional one. This requires a market share of at least 2530% in order to break even, a difcult ask of any new product has to turn new technology into consumer products which are in demand; in other words it has to establish a new market segment, with product attributes which satisfy consumer needs. As already indicated, it is unclear at this stage what these will be has to win that market segment by drawing customers from existing players, customers who may be well content with the existing products. The market is already a ercely competitive one. One problem is that the costs of the hardware and the software of the new technology are likely to be high, which, if reected in the price, will reduce the competitiveness of the new product. The new handsets, since they will include a digital still camera, a video camera, an MP3 player and an Internet-connected computer, are likely to be expensive, probably twice as expensive as existing handsets, at least if price reects the real cost level. This will limit the size of market. It is likely that the monthly charge, covering the fees for each service, needed to

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Nokia/Texas Instruments and Luck Goldstar have entered an Rmb230 million venture to develop the handsets and other equipment for TD-SCDMA. Qualcomm has leapt in with a charge that this alliance is violating its patents for the technology. This is a matter which has been fought out in the courts, resulting in various settlements and will continue to be so. The American standard is much cheaper to establish since it needs less base stations and very often no new licence. The EDGE technology improves performance but can be applied with the existing base station network. The network cost is as little as one tenth of the cost with the W-CDMA standard. However the W-CDMA standard is technically superior, carries much more trafc and has the greatest potential in the future. The choice by China will have large implications since it is by far the largest potential market. Whichever is chosen, experience shows that it will take years before the technology is stable, as introduction of the previous generations has already shown. Some of the companies are hedging their bets by being involved in the development of more than one standard. It is no means clear which is going to predominate in the future. There are short-term advantages in not going for the technically superior technology. Path dependence shows that choices now will determine the future course of development of the industry. Financial demands may incline operators to a second-best technology, or there may be a compromise in which the superior technology is limited at rst to densely trafcked urban areas. The early outcomes There is a conviction among observers and in the market that Hutchison is making a mistake and this is affecting its ability to raise money. Hutchison is suffering, in that its shares almost halved in value over 2002, largely as a result of fears about 3G. The company had to cancel a bond issue of US$1.45 billion. Even a company with Hutchisons resources is not immune from damage caused by the failure of such a large project. TD-SCDMA This view has discouraged others from entering the play. Even minor China players who have entered a partnership with Hutchison have showed an Siemens, inclination to withdraw. The reacDatang tion of most other players has been to stretch the capacity of the second generation technology to provide as China many of the third generation services as possible. The more popular of these picture messaging, access-

break even is going to be high. It is open to the rst mover to charge at below cost, but this requires both ample resources and a condence that future returns will justify such a strategy. The 3G handsets, at least initially, are also likely to be big, heavy, short on battery life as well as expensive, since the technology is immature. This was certainly the case initially with DoCoMo. This reduces their attractiveness to potential purchasers. It does appear to have been true of the rst handsets sold in Europe and Australia. What does Hutchison stand to gain or lose? Success will establish it as a major player in the industry. Failure will lose the company a lot of money. One of the reasons why Hutchison has a good appetite for risk is that it is a conglomerate, with very signicant interests in ports, infrastructure, retail and property, and only 13% of its revenue coming from the telecommunication sector in 2001. It is in a strong position to undertake a difcult and expensive project. Failure would not necessarily destroy the company. Fortunately all the other players, including its partners, want Hutchison to succeed since this will help them to recoup their own commitment of resources. Alternative technical standards Recently the Chinese government surprised all the main players with announcement that it was backing the standard TD-SCDMA (time division-synchronous codedivision multiple access). This is important since China is the largest mobile phone market in the world, with 190 million subscribers. The government in China has allocated a substantial portion of the scarce 3G radiofrequency spectrum for networks using the homegrown standard, two blocks representing 55 MHz as against just one block of 60 for the other two. It has also established a TD-SCDMA industrial alliance between the German rm Siemens and the state-owned local company Datang to develop the new technology. There is some disagreement on when the technology might be commercialized, with Siemens claiming a starting date as early as 2003, and Datang indicating late 2004.
W-CDMA Backers Supply companies Key markets CDMA2000

EU countries Nokia, Sony Ericsson Europe, Japan

Qualcomm (USA) Lucent, Samsung USA, Japan, South Korea, China

Figure 8.6 Possible 3G technical standards

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ing corporate email, online ticket booking are already available using second generation technology, supplied by Nokia and Samsung. In some cases, the services are not far short of those provided by Hutchison. This may act as a stopgap until it becomes clear how the market is responding to the Hutchison initiative. It is possible that an unexpected service such as global positioning will turn out to be the prime seller. For its competitors the entrance of Hutchison 3 represents, and will continue to represent, a competitive challenge. The British market is a good example. The launch of the new system was not impressive. The bad press for clunky handsets with low battery life and poor network coverage and connections inevitably led to a poor subscription rate running well short of target levels. There was a rumour of a signicant number of handset returns because of poor quality. As a consequence the strategy of Hutchison was quickly changed from an emphasis on product differentiation, with the next generation services of video and high-speed data transfer, to one based on price. The price was reduced to a level only one-third of the average level, supported by low handset prices. The response in the market has been positive, with sales rising by ve times. The other players may be forced to follow suit with the result of a price war. How long Hutchison can sustain such a price war is unclear. The difculties of Hutchison were compounded by two events soon after the launch of 3 in Britain, rstly, a downgrading of its credit rating by Standard & Poors and secondly, difculty with a minority shareholder partner in the British venture. Hutchison has a 65% share while the minority partners are the Japanese pioneer DoCoMo (20%) and the Dutch carrier KPN Mobile (15%). Hutchison 3 made a 1 billion cash call to assist in securing loan extensions from its banks to nance the new project. KPN refused to meet its obligation of 150 million, on the grounds that it was a breach of its shareholder contract. It demanded that the Hong Kong group buy it out at 140% of fair price. Hutchison sued for damages, having had to ll the gap by raising capital, thus creating further exposure to the project. Case Study Questions

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1. What are the main problems which might arise when an enterprise is seeking to gain competitive advantage by being at the cutting edge of technological innovation? 2. What is the nature of the relationship between a new technology and a new product? 3. Why is Hutchison adopting such a risky strategy in being the rst mover on 3G? 4. If Hutchison is successful, what will be the impact on the industry and the other players in that industry? 5. Indicate rst-mover advantages and disadvantages in at least one other industry compared with mobile communications.

Reading Bolande, H. A., Hire wireless act, Far Eastern Review, October 31, 2002: 3640. Bolande, H. A. and Drucker, J., Chinas schism on cellphones rocks industry, Wall Street Journal (Eastern edn), November 1, 2002: B1. Budden, R., New entrant Hutchison sees big surge in 3G phone sales, Financial Times, June 21/2 2003, Money and Business: 1. Financial Times IT Review, June 18, 2003. Hewett, J. and Kruger, C., Hutchison readies for spaceage mobile attack, The Age, April 14, 2003. Kruger, C., 3G, opening on a screen near you, The Age, April 11, 2003. Kunii, I., DoCoMo gets a clearer sign, Business Week, April 21, 2003: 22. Kynge, J. ,China backs home-grown 3G technology, Financial Times, November 1, 2002: 17. Leahy, J., Hutchison Whampoa downgraded, Financial Times, June 13, 2003: 31. Leahy, J. and Bickerton, I., Hutchison threatens to sue as KPN nds 3 a crowd, Financial Times, June 12, 2003, Companies and Markets: 23. Leahy, J. and Nuttall, C.,Li Ka-shings 3G plan hits a snag, Financial Times, June 13, 2003: 31. Nutall, C., Hutchison mobile price cuts represent a tough call for rivals, Financial Times, June 6/7, 2003 Money and Business M3.

Key strategic lessons Competitive advantage is a relative notion, referring to the ability of one enterprise to satisfy customers better than other enterprises. All generic strategies have the aim of maximizing the value added in transactions. This involves maximizing the difference between the value of the
output for the consumer and the cost of inputs for the suppliers. The division of the value added between the players customers, producers and suppliers is a signicant strategic issue.

There are ve possible generic strategies: cost leadership, product differentiation, focused cost