Breakthrough Ideas (continued)
Qualcomm’s Business Design
Strategic business design requires continual reinvention to ensure that the value you add to customers remains crucial and captured, keeping your company in the migrating profit zone. What is crucial is customer relevance, what matters most to customers. Added value is determined ultimately by what customers are willing to pay for. Strategic control is how you protect your profits from the power of customers, suppliers, and competitors.
Table 1 presents Slywotzky and Morrison’s strategic dimensions (including their Profit Zone Models to understand which strategic control points specifically protect what Profit Models) of Qualcomm’s Business Design.
Table 1
Qualcomm’s Standards-Based Business Design
I. Customer Selection
A. Telecom Institutions
B. Network Operators
C. Infrastructure/Integrators
D. OEM’s
E. Application Developers
F. End User Segments
II. Value Capture
A. Segmented Licensing of CDMA IP
B. Royalties on Manufacturer’s ASP
C. Sales of Cell Station Modems
D. Sales of Mobile Station Modems
E. BREW?
III. Profit Models
A. License/Royalty Profit
B. De Facto Standard Profit
C. Installed Base Profit
D. Value Chain Position Profit
E. Time Profit
F. Experience Curve Profit
G. New Product Profit
H. Transactions Profit?
IV. Differentiation/Strategic Control
A. Create and Commercialize CDMA Standards
B. Manage Confirmed Patent Portfolio C. Control/Advance CDMA Architecture
D. Provide Complete Standardized Solutions
E. Two-Year Product Lead: 1X, 1xEV-DO, radioOne, GpsOne
V. Scope
A. Multimode ASSP Design/Platform
B. SnapTrack/gpsOne Position Location
C. Internet Launchpad
D. BREW Platform and Distribution
E. OmniTRACS
F. Digital Media
Customer Selection. Who are Qualcomm’s customers? The comprehensive answer is: everyone who has a stake in the success of mobile wireless communications. Because understanding its customers must be Qualcomm’s prime priority, investors must also understand the intricacies and idiosyncrasies in developing, commercializing, and marketing a new mobile wireless communications system based on an innovative air interface.
Its innovative air interface gave Qualcomm a product worth selling. Qualcomm’s performance play strategy offered wireless stakeholders revolutionary 2G-spread spectrum architecture. Its discontinuous architecture added major value by incorporating unique features introduced by its mastery of advanced coding: (a) direct sequence spread spectrum; (b) orthogonal coding on both forward and reverse links; (c) universal frequency reuse; (d) power control of transmission signals; (e) seamless soft handoff; (f) raked receiver for summing multipath propagation diversity; and (g) variable rate vocoder transmission of voice.
Yet, the spread-spectrum breakthrough was just the beginning of what Qualcomm had to do to commercialize CDMA. A review of Qualcomm’s CDMA Timeline from its web site reveals a few of the multiple organizational tasks that had to be accomplished before its commercialization of CDMA could be considered viable.
qualcomm.com
Founded in 1985, Qualcomm introduced the concept of CDMA in November 1988. That is, Qualcomm told us what it intended to do with its spread spectrum architecture. In November 1989, Qualcomm showed us what it could do with an open demonstration in San Diego of its use of spread spectrum with power control, rake receivers, and soft handoffs. Three months later, with NYNEX, Qualcomm demonstrated CDMA in NYC.
Over the next 3 years, Qualcomm began large capacity tests, received their first CDMA order from US West, and were granted the first of many patent approvals, beginning with soft handoff. In 1993, Qualcomm completed the IS-95A standard, which was adopted by TIA as a North American digital standard, and conducted its first commercial market trial.
But, the key event in 1993 was the Korean MIC’s (Ministry of Information and Communication) decision to adopt CDMA as a national cellular system. In 1994, the first Korean CDMA trial system was unveiled. Although Hutchinson was first to launch CDMA in Hong Kong in 1995, the first strategically noteworthy launch came in 1996 when South Korea launched its commercial CDMA system. Qualcomm had played its first Asia card, demonstrating how it would nurture Korea’s mobile telecommunication industry, which today is the best in the world.
Also in 1994, Sprint PCS selected CDMA, which was standardized for the PCS band in 1995. In 1996 and 1997, commercial launches were underway in the US by PrimeCo (now part of Verizon) and Sprint, with commercial services in 100 US cities by the end of 1997. Also, Qualcomm played its second Asia Card in1997 when CDMA was accepted as a wireless solution in Japan.
Qualcomm’s multitasking included numerous and assorted unfolding strands: (a) transforming research on spread spectrum into product development; (b) controlling the architecture by patenting its proprietary features and licensing its intellectual property to about 50 companies; (c) beginning the educating-demonstrating-training-trialing-selling process, with commercial trials to prove advanced performance that preceded and cemented sales; (d) simultaneously, introducing CDMA to standardization bodies so that it became a national TIA standard, was endorsed by TIA, and submitted to the ITU in the 1998 IMT-2000 Process for selecting a 3G standard; (e) gaining acceptance by Korea’s MIC as a national standard and by Japan as an accepted standard; (f) influencing operators to choose cdmaOne for their RANs, which were based on finalized IS-95A or B standards, (g) rolling out CDMA commercial trials and networks; and, (h) opening new market niches for a value web of infrastructure suppliers, system integrators, equipment testers, chip and electronic component manufacturers, and handset, card, and PDA manufacturers so that they could provide components and services for the selectively open, but proprietary and licensed, CDMA system.
Qualcomm’s success in commercializing CDMA was apparent by 1998, given ETSI’s endorsement of spread spectrum for its European 3G system. According to Dr. Alfred Chandler (2001, p. 4, his emphasis), “The first enterprises whose managers learn to develop, produce, and sell in national and then world markets - that is to commercialize, to bring to market, a product of new technical learning - become the initial builders of high technology industries. …I term such enterprises first-movers. …They were the first to develop an integrated set of functional capacities essential to commercialize the new product in volume for worldwide markets.”
Thus, the commercialization of CDMA as an innovative and evolving technology was a momentous achievement for Qualcomm. Precisely because this accomplishment required a start-up company, which faced massive resistance from established mobile wireless competitors, to develop so many organizational capabilities so rapidly. The advanced technologies and the winning strategies that made this David-meets-Goliath story possible were discussed in Parts I and II. Here, we want to understand: (1) an enlarged view of who is the customer; (2) the marketing process in high technology generally; and, (3) the game theoretical dynamics of cooperation-competition in the 3G wireless value web.
1. Who is the Customer? Qualcomm had to develop relationships with multiple layers of telecom stakeholders: (a) governmental agencies like the FCC and Korea’s MIC; (b) standardization bodies like TIA and the ITU; (c) carriers who make the decisions about the RAN to be used in their networks; (d) the infrastructure, chipset, and handset providers to the operators, who are in fact the direct customers for Qualcomm’s licenses, royalties, and chip sales; (e) end users whose needs and priorities are the origin of a modern mobile wireless value chain; and (f) competitors, whose interests often conflicted at every layer. And, in 2000, (g) application developers were added when Qualcomm launched BREW with the intent of providing developers and operators with a complete standardized application platform solution.
2. High Tech Marketing. According to marketing expert Davidow (pp. 32-34):
“Marketing is characterized by diversity. …Technology marketing differs from other types of marketing because of its emphasis on functions nonexistent or unimportant in other fields. In the computer business and related fields, it is common to find companies spending 20 percent of revenues on direct sales, service, and postsale support. In most technology companies a tremendous amount of money is spent on documentation. By comparison, advertising and promotional expense amount to only a few percentage points of sales. In technology companies most of the marketing effort is devoted to direct sales, training and supporting distribution channels, customer education, and application support, service, and postsale support. …
…At best, advertising only raises customer’s awareness and creates a desire to learn more about the product. That’s because the purchase of a high-tech product is often a high-risk decision. When a customer is going to spend thousands and sometimes hundreds of thousands of dollars of dollars, impulse buying is rare.
Often the truth about a high technology product is not known until months after it is purchased. …When customers make decisions like those, the intangible factors become important. Customers evaluate suppliers on how well they will perform and on how much they can be trusted. …Reputation, service, support, and references are more important [than advertising].”
Thus, to sell CDMA, Qualcomm had to establish both a reputation based on demonstrating excellence to prove excellence and relationships within the wireless community based on proven trustworthiness in its promises of training or support and in the excellence and timeliness promised by its roadmap. By providing outstanding education, training, service, and post-sale support to operators and members of its value web, Qualcomm demonstrated its technology’s excellence and corporate trustworthiness; simultaneously, these achievements countered the expectation’s management of its competitors. Only by satisfying the needs and priorities of its regulating and supporting institutions, CDMA operators, infrastructure suppliers and integrators, component suppliers, handset manufacturers, and application developers could Qualcomm enable its total value chain to meet the needs and priorities of mobile wireless end-users that were satisfied by the reliable, less expensive, high quality service provided by its unique spread spectrum architecture.
Thus, selling to any specific customer is embedded in a multifaceted process that requires marketing to all stakeholders. These distinct groups of stakeholders often require further segmentation by industry, geography, purchasing patterns, relationships, behaviors, politics, and priorities to decipher the secret codes that not only have economic, but also political, dimensions. The details of marketing requires segmenting distinct groups into individual units with specific needs and priorities and understanding each segment’s or individual customer’s specific system economics and business policies that are influenced by their web of interrelationships with other wireless stakeholders. Paul Philp (p. 10) introduced a broad term, the whole industry system economics (WISE), in the August 2002 RTW Report, “The WISE is the set of all the social, political, and economic practices and policies that make up the industry.” Thus, understanding the WISE remains crucial for Qualcomm’s success in its worldwide market.
The heart of Qualcomm’s marketing is education, training, trials, service, and support to build a reputation for providing complete standardized solutions. Qualcomm’s customers include its entire value web, which is organized from upstream to downstream: (1) Institutions (e.g., regulatory, standards coalitions, government); (2) Network Operators; (3) Network Infrastructure Suppliers/Integrators; (4) Manufacturers (integrated circuits and mobile terminals); (5) Application Developers and (6) End Users (with consumer and business segments that are further segmented).
I believe that Qualcomm fully understands that business is rarely a zero-sum game. And, that it is a classic gaming error is to treat your value web as if it were your enemy rather than you partners. Andrew Grove’s “Only the Paranoid Survive” is a catchy title, but too extreme to be taken literally as useful pragmatic advice. Alert vigilance for new substitution threats, new discontinuous technologies, and innovative and disruptive business models is certainly required. But, building trust requires openness and mutual disclosure that paranoids see as too threatening to embrace. Instead, Qualcomm’s value-web of stakeholders and customers, just like Intel’s, require strong relationships based on respect, cooperation, and mutual trust. Moreover, today’s competitors are potentially tomorrow’s customers.
3. Co-opetition in the Value Web. In Co-opetition, Brandenburger and Nalebuff (1996, p. 4) said, “Business is cooperation when it comes to creating a pie and competition when it comes to dividing it up.” They continued (p. 7, original emphasis), “Game theory focuses directly on the most pressing issue of all: finding the right strategies and making the right decisions.” And (p. 10):
“All the elements in the game of business are constantly changing; nothing is fixed. … People are free to change the game of business to their benefit. And, they do. … Real success comes from actively shaping the game you play—from making the game you want, not taking the game you find. … This is where game theory finds its greatest opportunities: in changing the game. Changing not just the way you play, but changing the game you play.”
In its time, each company plays many parts, shifting its role relationships from supplier to customer to competitor to complementor. Across time, the players dynamically shift roles upon various stages, called business landscapes, playing many parts in various value webs, until each game plays out or changes into a new game yet to be played. But, the masters of the game transform all games, old or new, into the game that they know best how to play.
Qualcomm significantly changed the 3G-Game in three ways. Initially, Qualcomm changed the scope of the game from a Voice-Game only to a Data-Optimized-Game for high data rate delivery, multimedia applications, and wireless Internet. Next, Qualcomm changed the nature of the standards game from a battle between competing spread spectrum standards into a radically new Harmonization Game by enabling seamless interoperability across modes, bands, and networks using ZIF-simplified radio-One multimode architecture. Then, Qualcomm changed both the pace and depth of the platform game to a Application-Platform Game by rapid expansion of the basic platform to include position location, the Internet Launchpad’s multimedia, and the BREW platform and Distribution System to kick start speedy application development, advanced mobile devices, and new data service delivery.
This rapid pace of technological and marketing innovation, when transformed into ever-new families of chips that simultaneously extend, segment, and harmonize the market, continually strengthens, sustains, and leverages competitive advantage. Rapid innovation within a stabilizing and predictable general-purpose platform is the top secret that generates a long-lived technology franchise.
Because no competitor can match the sophistication of Qualcomm’s mastery of spread spectrum, nor its pace of continuing evolution and continual platform expansion, Qualcomm realizes that it has won the battle for technology supremacy. The industry has begun a transition toward recognizing a shift in leadership from Europe to Qualcomm and Asia. This mean that Qualcomm’s most pressing concern remains increasing market-scale as rapidly as possible. To do this, it must support all standards within its embracing platform because only Qualcomm best plays its worldwide harmonizing game.
Having achieved architectural control of spread spectrum, their goal becomes driving network externalities to increase the size of the pie worldwide. Originally, being sure that there was a pie came before competing for your share of the nascent pie because it was vital to complete the open information system’s value chain and value proposition during a narrow window of opportunity. The initial version, the generic whole product required the cooperative and well-timed contributions of the value web, but so do the expected, the augmented, and potential whole products that follow.
Economic principles require Qualcomm to give priority to increasing the size of the pie over competing for share. A larger pie benefits from increasing returns to scale, the heart of a de facto standard business design. Both supply-side and, more important, demand-side scaling increase the margins associated with larger pies. And, most important, the potential demand-side dynamic associated with a complete standardized solution for the worldwide mobile wireless industry creates a Guinness-Record-Sized Pie because of the nonlinear scaling introduced and magnified by worldwide network effects. After assuming some loss of market share for Qualcomm, sheer market size still dominates the stratagem of competing for higher percentage market shares within a smaller market.
In a dynamic world that requires adaptive co-opetition, the principles of game theory demand that Qualcomm consider its wireless competitors to be partners and customers as well as from-time-to-time rivals. Partners, because they help drive expansion of the worldwide market and are part of Qualcomm’s value web. Thus, it is in Qualcomm’s best interest to encourage the rapid roll out of UMTS by providing technical assistance and support. Customers, because they license CDMA and pay royalties. And, because Qualcomm hopes that many will choose BREW, SnapTrack or its 6xxx MSMs because of their technology and business advantages, it must court its competitors and try to transform them into satisfied customers by meeting their needs and priorities. Rivals, because Qualcomm believes its complete standardized solutions offer the most total value to all parties, including itself. Taking Philp’s WISE into account, Qualcomm’s wise solution is the best choice because it ensures system-wide economic efficiency. |
