INCUMBENT RESPONSE TO DISRUPTIVE INNOVATION: THE CASE OF THE SWEDISH FINNISH TELECOM OPERATOR TELIASONERA AB

This article presents a preliminary analysis of a retrospective longitudinal case study of an incumbent, the Swedish Finnish Telecom operator TeliaSonera AB, with focus on its responses to technical and business model change. Findings nuance the general understanding of Telco's as passive actors in relation to disruptive change. In relation to technical change the case company has successfully in transferred its technology from one generation to the next during more than 20 years. In relation to business model change the case company has been proactive but not successful in major business model changes, however successful in minor business model adaptions. An implication hereof is that the business model concept as such has low predictive power in explaining success and failure and is in the need of an operationalization. In addition, the article discusses the relationship between technological innovation and business innovation.  Business Model Change is an area that currently has gained extensive attention among both practitioners and management scholars (Afuah, 2014; Amit and Zott, 2012; Kim and Mauborgne, 2005) The reason for this is that new entrants such as: Amazon, Google, Ryan Air, Skype, Spotify and Apple have successfully invaded mature markets with new and different offerings and thereby change the rules of these markets causing discontinuous change, or "disruption" (Berggren and Bergkvist, 2006) However, the empirical investigation of business model change has a few limitations: they are mainly made from the new entrant's perspective where the novelty of the business model is the explanation of the success, they do mainly include successful cases and they assume that the existing players in the industry are rather passive. Furthermore, they seldom include the interaction between business model change and technological innovation. One industry that recently has faced a continuous stream of both technical and business model discontinuities, as well as many new entrants, is the Telecom industry. As industry Telecommunication is paradoxical. On the one hand it can be regarded as mature (i.e. a fierce competition among existing players mainly based on price and performance) On the other hand, it can be seen as an emerging industry where new technologies and new business logics converge. For example, Skype has re defined the long distance and video call market. Apple has, through the introduction of the iPhone in 2007, created an enlacement of content and handset; thereby taken a position as a key player in the industry. Google can be assumed to have plans given their successfully introduction of the Android operating system, which already has a 75% market share, and subsequent acquisition of Motorola. Moreover, former market leaders have suffered severely. Incumbent national operators have had their margins deteriorated despite massive cost cutting efforts and the leading terminal manufacturer Nokia has been nearly wiped out. This article deals with incumbents' proposed inability to respond to disruptive change, particularly if challenged by new entrants (Chandy Tellis, 2000) More specifically it analyses the case of the Swedish Finnish telecom operator TeliaSonera's activities and responses to both technical and business model changes. By doing this the article reflects, from an external perspective, how an incumbent manoeuvre in a fast changing business landscapes. Thereby it contributes to a more nuanced picture of incumbents' successful and unsuccessful responses to disruption, and determines what mechanisms that govern the outcome. TECHNOLOGICAL DISCONTINUITIES AND BUSINESS MODEL CHANGE To frame our research topic, we start to investigate the literature on technological discontinuities and then turn to business model change. Technological Discontinuities Technological discontinuities have been identified as major triggers of change in fast evolving industries and their effects have been well documented by industry life cycle theorists such as Utterback and Abernathy (1975) Synthesizing contributions from technology management literature, evolutionary economics and organization ecology, Agarwal and Tripsas (2008) distinguish three stages of evolution emergence/growth, shake out and maturity. The mature industry stage is characterized by competition between incumbents, incremental innovations, and low firm entry and exit rates. The advent of technological discontinuities like the introduction of the Internet at the mature industry stage may either speed up the transition from maturity towards decline, or it may fuel a new and reinvigorating cycle, taking the industry back to an emergent stage (Afuah Utterback, 1997; Agarwal Tripsas, 2008) At such times, when new entrants are trying to create and dominate nascent markets incumbents must avoid resource and routine rigidities (Gilbert, 2005) Instead, internal discontinuous and dramatic change, driven by top management, may be necessary (Huy and Mintzberg, 2003) In addition, it can be expected that capabilities need to be renewed and that many (if not all) elements of the incumbent's business model have to be overhauled in order successfully adapt to the disruption. For long time technical discontinuities has been an explanation for why firms fail (or survive) However, recently the focus has shifted, from the technical innovation or discontinuity to the business model. Business Model Change Business model innovation has been proposed as one, if not the, explanation for the success of the new entrants (Osterwalder and Pigneur, 2010) Conceptually business model innovation refers to a type of organizational innovation in which firms identify and adopt novel opportunity portfolios (Teece, 2010) Exactly what constitutes a business model is still under debate, for a review see for example Morris, et al (2006) or Klang, et al (2014) Osterwalder and Pigneur (2010) suggest a nine component model summarized in the business model canvas. Others such as Tongur and Engwall (2014) represents a more minimalistic approach and is satisfied with only three main components (value proposition, value delivery and value capture) In this article we take a middle approach suggesting that a business model in composed of customers, value proposition, delivery system and a financial system. The financial system is the business cost structure and revenue model. Given that, a business model change does not need to include changes in all components. In this article, a business model change refers to when at least one component is altered. Incumbent Response While it may seem natural to expect incumbents to respond to disruptions by business model adaptations, it appears that except from the notable exceptions of Dell and IBM, it has rarely been observed. In fact, some researcher even argue that incumbents are more or less unable to respond (Chandy Tellis, 2000) Christensen (1997) attributes this inability to the asymmetries of skills and motivation vis a vi new entrants, occurring due to the processes, resources, and values typically developed in incumbents through years of successfully growing and managing current business. These asymmetries make incumbents less likely to pay early attention to emerging disruptions and even if they do notice them, they are reluctant to invest aggressively in them as they tend to target the industry's least profitable costumers. Incumbents would in effect have to risk cannibalizing their premium business for the purpose of getting a position in the low end of the market, which tends to be very difficult to commensurate with the internal values and KPIs of mature firms. Instead, incumbents can be expected to follow certain response patterns (Christensen, et al, 2004) Incumbents might: Cede market segments to the new entrant and try to focus on the more profitable customers. Cram the new technology into their existing business model, which is highly unlikely to succeed, because it will take too long to make it perform at the level required by the high end customers. Co opt for growth, by targeting the new entrants' customers with a scaled down version of their core product. Co opt for survival, by bringing the new technology or business model into the lower end of the existing customer base and try to increase entry barriers around core segments. Only the two last options involve business model change. They are the least common responses and also proposed to be the only viable choices for meeting disruption (Christensen, et al. 2004) While Christensen has been criticized for cherry picking cases that supports his thesis and also misrepresenting them (Lepore, 2014) there still appears to be convincing indirect support. Organizations do become more and more inert over time (Carroll and Barnett, 1995) and the life span of firms in general appears to be decreasing dramatically (Foster and Kaplan, 2001; Louca and Mendonca, 2002) METHOD In this article we investigate TeliaSonera AB (TS) the Scandinavian and Eurasian Telecom Operator and examine how it has managed the adaption to disruption. In focus of our investigation is how the incumbent firm has adapted, what measures and actions that has been taken and what effect it has had on the firm's position. Accordingly, with this focus we applied a retrospective longitudinal case study approach (Yin, 1994; Ahlstrom and Karlsson, 2009) As time frame, we have focused upon 1992 2015. The reason for this selection is that it includes: the introduction of mobile telephony, the peak of the Internet bubble (a period characterized of the birth of the Internet industry) the introduction of smartphones and tables (i.e. the introduction of Apple's IPhone) and the introduction streamed services (i.e. Spotify and Netflix) However, to fully understand the incumbent's response, it is also necessary to cover the antecedents leading up to the introduction of fixed and mob