by SH Lee · 2016 · Cited by 7 — This study looks into a catch-up strategy that Apple and Xiaomi used and examines the results on the creative imitation of business model in the smartphone

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Asian Journal of Innovation and Policy (201 6 ) 5.1 : 00 1 – 0 18 1 Creative Imitation as Catch – u p Strategy: A Business Model Seung – Hyun Lee * , Youngkwan Kwon ** , Ji Hye Lee *** , Young – Il Park **** Abstract Catch – up is a well – known and familiar terminology for innovation scholars in developing countries such as Taiwan, Korea and China. The strategy, however, is too difficult to perform in each industry. This study looks into a catch – up strategy that Apple and Xiaomi used and examines the results on the creative imitation of business model in the smartphone industry. It is quite surprising that even Apple is based on catch – up strategy. They wanted to catch – up Nokia. Our case study shows that these two companies quickly cau ght up with the leaders , and the common feature of their strategy is characterized as creative imitation of b usiness model. Creative imitation of business model is different from creative imitation of innovation. Furthermore, this research confirms that th e creative imitation of business model leads to aggressive creative innovation. Keywords C atch – up strategy, creative imitation, innovation, business model, strategy of follower I . Introduction Fierce inter – firm competition and the shortening of the technology life cycle are increasing the necessity for technological innovation and the cost of innovation. In addition, many companies are adopting new business models, evolving and updating existing ones and becoming new leaders themselves (Chesbrough, 2006). Then, how can followers catch up with the leader? The literature points to the fact that laggards cannot expect to catch up successful by simple imitation. However, costly innovation is never an easy option to consider. This is especially difficult for followers in developing countries where technological innovation is difficult to realize (Na and Bae, 2009). S ubmitted, February 22, 2016; 1 st Revised, March 14; Accepted, March 15 * Institute; sweetsnow082@kwdimail.re.kr ** Korea Fair Trade Mediation Agency; Department of Science and Techno logy Policy, Hanyang University; kykwan7@snu.ac.kr *** jihye_lee@ewhain.net **** yipark@ewha.ac.kr Asian Journal of Innovation and Policy (201 6 ) 5. 00 1 : 1 – 0 18 DOI: http//dx.doi.org/10.7545/ajip.201 6 . 5.1 . 00 1

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Asian Journal of Innovation and Policy (201 6 ) 5.1 : 00 1 – 0 18 2 In this context, creative imitation could be an alternative strategy (Niosi, 2012; Yu, 2000). Creative imitation adds new value to existing pro ducts and makes their positioning possible (Shenkar, 2010). And it is critical from a business strategy perspective (Milan et al . , 2014; Lee and Zhou, 2012; Jin, 2009), enabling firms to gain market power and to lower the burden of innovation at the same t ime. As imitation and innovation have been the main themes in innovation studies, the value of creative imitation has often been ignored (Milan et al . , 2014) or often regarded as a medium stage in the process of trying to catch – up (Kim, 1997). The existing literature on imitation for catching up only concentrates on product imitation (price, design and applied technology). Since 2010, some imitation related studies started to identify the imitation of the business model (Shenkar, 2010; Enkel and Grassmann, 2010; Kal and Christopher, 2012; Enkel and Mezger, 2013), arguing that the business model can be a subject relevant to imitation. Recent studies on the business model also prove that imitating a business model can create new value (Johnson, 2010; Kim and M auborgne, 1999) and achieve high performance without the development of new technology or products (Kang, 2011). This study puts forward the following two proposals. Firstly, followers can use creative imitation of a business model as an efficient catch – up strategy. Secondly, creative imitation of a business model comes with innovation. This study identifies these propositions by reviewing the case studies of Apple and Xiaomi. They are timely and appropriate case studies to review the evolution of a strateg II . Theoretical Background 1. Catch – u p Using an Imitation Strategy product (Park, 2001). Types of imitation include counterfeit, copy, design imitation, creative application, technological improvements and application to other industries (Schnaas, 1994). Imitation is the opposite concept to innovation that stands for a new process, product, or service, or a new way of p roduction, reception and execution (Thompson, 1965). Regarding innovation innovation and the realistic assembly of genuine creation and development, and innovation (Kim, 1997). Most of the innovation, however, does not come with an invention, but is deeply rooted in an existing idea.

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Asian Journal of Innovation and Policy (201 6 ) 5.1 : 00 1 – 0 18 3 Schnaars (1994) conducted case studies regarding imitation as catch – up strategies in 28 industries and proposed three type s of imitation including gaining competitive advantage over a cheap price (price – point), developing and producing an excellent product, aiming for sales (second, but better), and targeting differentiated marketing paths based on strong market share. Shanka r et al. (1998) conducted a similar study insisting that there are two ways for followers to seize a leadership position: 1) by using a lower price, advertisement or retail power and 2) by copying or improving a certain part of the product to realize produ an innovation strategy and an imitation strategy. The study shows that the first mover uses an innovation strategy for market entry and the follower uses an imitation strategy to enter the market. Also, in the case of an imitation strategy, the company will strategically select one of four types, including replica, chnology capacity and market condition. As Korea industrialized quickly through a policy of imitation, imitation is proposed as a crucial catch – up strategy among researchers. Lee (1988) classified four types of national technology development strategy: as technological dependency (Central and South America), noninterference (Australia, Malaysia, etc.), independent development (China, India, etc.) and imitative learning (Korea, Taiwan). A study found that an imitative learning strategy produced the most succ essful results. Kim (1997) is similar to Lee – up strategy more inclusively and combines the life cycle of technology innovation of Utterback and Abernathy to propose technology development between advanced countries and d eveloping countries. Unlike the situation in an advanced country, technology development in developing countries (including Korea in those days) went from a period of hardship to a period of execution and then to a period of flexibility. It also followed p rocesses of Imitation Stage, Creative Imitation Stage, and Innovation Stage. Kim (1997) states that Korean Industrialization started with simple imitation in the 1960 and 1970s, and developed through creative imitation in the1980s. Thus, creative imitation is essential in the process of ensuring a country catches up. 2. Creative Imitation as an Effective Catch – u p Strategy adds new value to it as an imitation strategy. Creative i mitation applies to design imitation, the creative application of technology, technological advances and other industrial applications (Kim, 1997). The concept was first

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Asian Journal of Innovation and Policy (201 6 ) 5.1 : 00 1 – 0 18 4 introduced by Levitt (1966), who states that creative imitation not only stands for a simple copy of an existing product, but also improves its current version Drucker further asserts that creative imitation is not creating new products or services, but improving existing ones. In other words, when a company that is a follower (and not a leader) reworks a product and service and adds options, it can apply existing products with differentiate d characteristics to other markets especially in developing countries in order to gain a competitive edge. the importance and role of creative imitation increased. Existing researc h has concentrated on innovative studies and has often neglected creative imitation (Milan et al . , 2014). In terms of corporate strategy, there is not enough research on creative imitation. Recent research has shown that creative imitation is important in terms of corporate strategy (Milan et al . , 2014; Lee and Zhou, 2012; Shenkar, 2010; Jin, 2009). However, the research only focused on differentiated products (price, design, and applied technology), which are similar to simple imitation and limited creativ e imitation about product imitation. This study found that there is a lack of integrated reviews or research reviews. Therefore, this study listed creative imitation studies in a chronological order. atively add new value based on imitation. Creative imitation can create a differentiated new version compared to existing ones and it is difficult to distinguish creative imitation strategy that can bring about the effect of innovation by reducing the risk compared to simple imitation or innovation and thus realize speedy growth. Research on creative imitation is especially popular among Chinese researchers (Yu, 2000; Jin, 2009; Lee and Zhou, 2012). This shows that China values creative imitation highly during the catch – up process. Therefore, how can we realize creative imitation? Previous research focused on aspects of the product (design, function, and price) to realize creative im itation. However, after 2010, some imitation research mentioned the can be improved by changing its business model through imitation and limiting and Grassmann, 2010; Kal and Christopher, 2012; Enkel and Mezger, 2013). Shenkar (2010) states that recent imitation is accepted in various pr oducts, services, processes and business models. Kal and Christopher (2012) propose capacity.

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Asian Journal of Innovation and Policy (201 6 ) 5.1 : 00 1 – 0 18 5 Table 1 Overview of c reative i mitation s tudies Author (Year) Definition and significance of creative imitation Levitt (1966) Improving existing version and adopting new uses. First to introduce the concept of creative imitation. Dracker (1985) Making improvement by adding differentiated traits to existing product. Systemized the concept of creative imitation. Schwarz (1994)) Creatively applying innovation from other industries. Expansion and application of innovation in cross – industry played important role in creative imitation. Lowe (1995) As the general social progress, innovation was ma de by creative imitation. However, in this process, it was scantily reviewed in innovation studies. Kim (1997) Purpose was to copy the product, but new function was creatively added (differentiated design, technology advance, application of other industri es, creative application) and creative imitation was the main success factor of Japanese industrialization. By creative imitation, innovative products were created. Yu (2000) Granting differentiated value (design, function and price) to advanced product was the main factor to chase Hong Kong companies. The best strategy when market uncertainty is high. Arnold and Bell (2001) Developing and utilizing existing knowledge base. Differentiated from simple imitation. Became the main source of economic developm ent. Thus, it is essential for the industrialization of developing countries Park and Bee (2004) Strategy that start – up companies used as local pioneers and as global followers. Strategy for the coexistence of imitation and innovation. Valdani and Arbore (2007) As a legal imitation, in order to enter new customer, market and sector, imitating the most innovative product in the most innovative way. Jin (2009) Based on imitation, adding creative value. The reason behind J economic growth, and Chinese companies worked on this for the last 30 years and need to continuously line up. Shankar (2010) By creatively adding new value to the existing product, the strategy is to differentiate one from other products. Followers can enhance their power more significantly in the market compared to the introduction of a simple imitation product, and at the same time, they can lower the burden of innovation. It is a fairly efficient corporate strategy. Henkel and Grossmann (2010) U tilizing a solution that was developed by industry and then applied to different kinds of industries. Creative imitation among other industries can increase innovation and bring destructive innovation. Lee and Zhou (2012) The pioneer functionally improves and adds additional value. Followers have no need to engage in pure imitation, but they have a need to differentiate within creative imitation. Creative imitation can compared to pure imitati on. Milan et al. (2014) The most complicated type of innovation that comes with imitation. Creative imitation touches innovation and it is a strategy for innovation that is just as significant. Companies need to positively use creative imitation not as a threat, but as an opportunity against innovation.

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Asian Journal of Innovation and Policy (201 6 ) 5.1 : 00 1 – 0 18 6 3. New T ype of C reative I mitation: Creative I mitation of a B usiness M odel If we look into previous studies, a business model is defined in two ways. Firstly, it is defined in terms of the profit – making ability of a company that sells the product or service. In this case, the business model is defined as a logical mechanism for g enerating profit. Elaborating further, Linder and Cantrell (2000) define a business model as the key logic of a corporate structure to create profit. Margretta (2002) also defines it as the story that explains how corporate functions. For his part, Rappa ( 2001) defines the business model as business management that values sustainability that can create profit. Secondly, it is defined as an interrelationship. A business model is defined by the interaction of the business strategy, business process and the te chnology that the company holds. Timmers (1998) defines a business model as a framework of product, service and information flow. Hawkins (2001) defines product and service – related cost and financial interrelationship as a business model. Osterwalder and P igneur (2002) define the business model as a medium of business process and business strategy, and specification in terms of conceptualization and a structural level. Thus, the latest roundup of research is that the business model is the concept that creat deliver and obtain this value (Amit and Zott, 2001; George and Block, 2011; Morris et al . , 2005). As such, the importance of a business model is stressed as it underlies all business activ ities including corporate value creation, corporate management, marketing, business development, law (intellectual property), finance, new product development and process improvement (Zott and Amit, 2010; Chesbrough and Rosenbloom, 2002; Hamel, 2000; Johns on et al . , 2008; Osterwalder, 2004 ; Chesbrough, 2006). However, according to recent research, more than 60% of young entrepreneurs imitate other domain projects or external business models instead of pursuing innovation. This kind of imitation of a cross – i ndustry business model reduces the time spent on innovation and plays a role in leveraging a new business model and creating new value (Johnson, 2010; Kim and Mauborgne, 1999). In other words, the imitation of a business model can be utilized in other indu stry to create value (Enkel and Mezger, 2012). Nestle – blade, printer – This business model enables a close relationsh ip with customers compared to existing product. However, if the product creates new value through imitation

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Asian Journal of Innovation and Policy (201 6 ) 5.1 : 00 1 – 0 18 8 few companies have successfully caught up or achieved the results of catching up. Therefore, there is limitation to apply a meaningful quantitative analysis. Secondly, catching up in the smartphone market cannot be assessed through a simple study of technology catch – up or a particular product. The smartphone market has flexible characteristics that change depending on the consumer’s preferences, culture and environment of the market. Thirdly, the smartphone is an intensive, cutting – edge product from various sectors. A quantitative understanding of smartphone technology together with the processor technology (CPU), audio, touch module, camera, display, user interface (UI) technology with an audible device have limitations. Lastly, it is difficult to find innovative catch – up cases like Apple. Thus, this study w ill provide a deeper and richer understanding by strategically analyzing catch – up case studies in the smartphone market to fill the gap of current studies. This study focuses on Apple and Xiaomi. These companies were chosen as two of the global top five c ompanies (Q4, 2014) that were determined to have achieved catch – up results (Table 2). Table 2 Worldwide smartphone sales Top 5 Company 2014Q3 2014Q4 Units Market share Units Market share Apple 38 , 187 12.7% 74 , 832 20.4% Samsung 73 , 212 24.3% 73 , 032 19.9% Lenovo 15 , 012 5.0% 24 , 300 6.6% Huawei 15 , 935 5.3% 21 , 038 5.7% Xiaomi 15 , 773 5.2% 18 , 582 5.1% Others 142 , 892 47.5% 155 , 702 42.4% Total 301 , 010 100.0% 367 , 485 100.0% Note: units in thousands Source: www.gartner.com Also, Apple and Xiaomi used creative imitation as a business model for catching up. But their strategy is a little different, as summarized in Table 3. Innovation at Apple and Xiaomi is significantly different both in extent and dimension. This is explored through the case analysis. Table 3 Firm s catch – up strategy Firm Apple Xiaomi Strategic target Product Creative imitation Imitation Business model Creative imitation Creative imitation Result of the strategic Innovation Innovation

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Asian Journal of Innovation and Policy (201 6 ) 5.1 : 00 1 – 0 18 9 For this study, data were collected from theses and reports on Nokia, Apple and Xiaomi, company reports, newspaper and magazine articles and government papers from 1996 to 2014. These longitudinal materials gave – up strategies and performance based on their progress over time and evolution of to their catch – up strategies. IV . Case A nalysis of the S martphone M arket A sm artphone refers to portable device that combines the basic functions of a cell phone, various applications and Internet functionality, which has been used by PDAs and mobile PCs. A smartphone has a convenient and innovative UI compared to existing phones, enables Internet access via a wireless network, and adopts a standard operating system for various functions and use of the application. The existing mobile market used to be characterized by variability as the telecommunication industry experiences freque nt innovation (Kim, 2010). However, after the introduction of the smartphone, the pace of market growth has been even faster and the competition among global companies has become fiercer (Kim et al., 2011). This has resulted in shorter product life cycles and increase in the cost of technology development (Chesbrough, 2006). It is expected that there are many underlying aspects affecting catch – up strategies in the smartphone market. This study aims to focus on each ular technology or product. The study also compares and analyzes the difference between catch – up strategies and results. 1. Catch – u p S trategy of F ollowers Nokia was once a leading phone company; it launched the Nokia Communicator line starting with Nokia 9000 followed by Nokia 9210 and Nokia 9500 communicator. This product was the first smartphone with innovative technology. The Nokia 9210 was a communicator model with the first color screen and open operating system, recognized as a real smartphone. The Nokia 9500 was the first camera – phone and Wi – Fi – phone. Also, Nokia was the first company to incorporate functions of SMS, email, fax and the Internet into the mobile phone. Nokia was the first to offer a touch screen in 2000 and it launched the innovative Ericsson 380 with a Symbian function, which is fitted with its own operating system (OS). With its great hardware capacity and its own OS, Nokia became the leading company in the smartphone market (Chevallier, 2013). However, its smartphone market perform ance did not reflect the

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Asian Journal of Innovation and Policy (201 6 ) 5.1 : 00 1 – 0 18 10 announcement, when Nokia 9210 was released to early adopters it did not gain popularity and Nokia change its strategy, repurposing its product for corporate use. The Nokia 9210 is aiming at a niche market for the new technology maniac. (Money Today, 2000.11.22) Two models including the Nokia 9110 and Nokia 9210 are products targeted to business. These models offer various functions such as sending faxes, sending an d receiving email, and built – in – Internet. (Digital Times, 2003. 09.15) Apple was the first follower to chase Nokia. Established in the 1970s, Apples was the one of the major computer and IT companies; it entered the smartphone market ten years after Nokia. As Apple was not a mobile manufacturer, Apple learned about mobile – related technology swiftly as a latecomer. After combining UI technology, which was considered as a competitive advantage, and existing mobile technology, Apple launched the iPhone. In 200 7, Nokia – screen function. In 2008, combination of a device and its contents in a smartphone market. However, this business model was not anything new. When Apple launched the iPod, it used a new business model, which is the combination of software (downloading music) and hardware (iPod) so that users can easily downl oad music for a fee from the iTunes Store. Apple applied the same model to its smartphone by implementing creative imitation. At that time, Steve Jobs, the then CEO of Apple, explained that the iPhone is a device with mobile functions in addition to the iP iPhone is a reinvention of the mobile phone; it is more like the iPod than a By introducing a new business model, the iPhone gained a differentiated leve l of competitiveness. First, Apple built an asset centered on hardware and can steadily improve the product quality. This changed the rules of the game in the mobile industry an d Apple reshaped the smartphone market by creating and generating new value (Kim and Jung, 2010). After 2011, Chinese companies such as Xiaomi entered the market. Xiaomi is a start – up established in 2010. Lei June, the company founder, who used to be soft ware developer, listed as Kingsoft. Although Xiaomi had no hardware capacity, by imitating a mobile Internet company, Xiaomi used a catch – up strategy that differed from that of Lenovo and Huawei. June studied the strategy of leading firms, such as Apple, G oogle and Amazon, in order to from research, he used various strategies from the very early stage of the

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Asian Journal of Innovation and Policy (201 6 ) 5.1 : 00 1 – 0 18 11 business (Huryean, 2014). The triathlon model is a combination of A Xiaomi first released a smartphone in 2011. According to the triathlon model, and UI technology. Xiaomi followed existing companies by using a revised Android for OS. The Chinese company took charge of smartphone design and OS development to manufacture a product by Foxcomm and Inventec. Xiaomi pursued high specifications by adopti ng comparable cutting – edge technology compared to existing low – end Chinese companies. Xiaomi was a new start – up that had no hardware technology capacity or manufacturing infrastructure. Xiaomi did not produce the component structure of the Hongmi model r eleased in 2013. 1 In this situation, Xiaomi implemented a business model as a catch – up strategy. Lin Bin who is the co – founder of the platform to implement the service, so there is no i ntention to make money Xiaomi tried differentiation by adopting a content and device business model that rules the curren t smartphone market and by adopting a business model selling Kindles. This is an example of realizing creative imitation through the imitation of a business model. At the end, Xiaomi brought a destructive business model to the market (Park and Nam, 2014; T ECH and beyond , 2014). Xiaomi adopted a new profit – pursuing measure by adopting the business model device margin by a third compared to the average smartphone. The company made a profit from selling content and accessories. According to PCWorld, the margin of the Redmi 1S is about 23%. It is a stark 70% less than the iPhone 6 (MoneyToday, 2014.11.04). In order to realize the new business model, Xiaomi adopted a pre – ordering and post – prod uction measure. By maintaining online sales and marketing, Xiaomi pursued a differentiated catch – up strategy spec, low Nam, 2014; TECH and beyond , 2014). 1 The memory c hip (ROM+RAM integrated type) and camera are from Samsung, Quad – core p rocess chip (MT6589T) and the antenna module (MT6320GA) are from MTK and the touch module (MT5316) is from O – film (www.mi.com).

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