Technological advancements have always been affecting the strategy of and rivalry among individual firms. The increasing complexity of these technologies, however, is radically transforming whole structures and boundaries across industries. Firms that previously acted in completely distinct domains increasingly build upon the same technologies and compete within the same markets.
As these changes have a significant impact on businesses, managers need to find out if their company is threatened by convergence and adjust their innovation strategies accordingly.
Take smartphones, for example. During the 1990s and early 2000s, multiple industries served customers’ needs with individual solutions. For calling and texting friends and families, we used cell phones. Finding the fastest route to the Hotel by car was supported by GPS navigation systems. Browsing the web and responding to emails was done at home or in the office in front of a personal computer. And pictures were taken with a digital camera.
Nowadays, all these tasks have been taken over by our smartphones. This development has had significant impact on a wide range of businesses including traditional cell phone producers such as Nokia, whose smartphone division struggled for years and eventually got sold.
Two distinct, but related developments took place during the emergence of the smartphone. First, the manufacturers of these devices increasingly relied on a common technological and knowledge base. For example, touchscreens became the main input method of navigation systems. And cameras got equipped with Bluetooth for instant picture sharing. When technologies are used across different industries, we speak of technology convergence.
The second development, market convergence, can be observed when previously distinct industries increasingly serve the same needs of customer. This can happen either through customer needs becoming more similar or when products and services fulfill a wider range of needs. Back to the smartphone example: with the increasing quality of smartphone cameras, they eventually became a good enough alternative for digital cameras and camera producers were suddenly competing against smartphones.
In my master thesis, I analyzed convergence of 611 firms that have introduced smart home products between 2010 and 2015. Smart home is another interesting example of convergence as firms from previously different industries such as Amazon, Google, Bosch and British Gas are starting to compete within the same market (e.g. smart thermostats, home security, appliances,…) and adopt the same communication technologies (e.g. Wifi, Zigbee, Z-Wave) to allow interoperability.
The effect on innovation
How do firms react to this blurring of industry boundaries? More specifically, how does the innovative performance of firms change when facing convergence of technology and markets? My results show that when technologies are used across industry boundaries, firms tend to increase their innovative activity while focusing on fewer technologies. This can be explained through the uncertainty: In which technology should we invest? Do we have the required expertise to leverage the full potential of this technology? Firms reach out to external networks (even alleged competitors) and expand their collaborative activities which provides them fast access to technological knowledge and allows them to focus on their core expertise.
Market convergence increases the innovative activity as well, but the focus in R&D departments seems to get wider. Competition is increasing, as new players are entering the market. In order to maintain a competitive advantage and to enter new markets as well, new directions of innovation need to be tested and pursued.
From threat to opportunity
While both, technology and market convergence can initially be seen as a threat, deeper understanding about convergence can help managers in their response strategy and ultimately be an opportunity. First, managers need to find out if their company is affected by convergence. While this is no easy task, first indications can be collected. For example, by analyzing scientific publications and patent filings and how they relate to specific industries, managers can measure how broad of an impact these inventions have.
Second, after being aware of the different types of convergence (market and technology) and what their drivers are, managers can anticipate if their company is getting threatened by a new technology followed by new competitors at a later stage or if these two developments are happening concurrently. In the case of smart home, communication protocols are one of the main converging technologies and are strongly linked to the end-user product. A company developing a new product is likely to adopt a new technology at the same time. As a result, market and technology convergence proceed in parallel.
A counter-example is the convergence between cable television and wireline telecommunications industries. The change from analog to digital transmission as technological convergence was not directly linked to the end-user product, but to the underlying mode of how the service is delivered. In this case, the processes of market and technology convergence happened sequential.
As a last step, the right strategy for a firm threatened by convergence can be derived. When primarily faced with technology convergence and the required knowledge of the new technology is not available within the company, managers should extend their innovative capabilities through alliances, joint ventures, partnerships or mergers and acquisitions. When faced with market convergence, the tension and rivalry within a market will increase. Firms should therefore widen their innovative scope and pursue horizontal differentiation.
Raphael Breitner was a Master student in Digital Business and Innovation at the Vrije Universiteit from 2017 to 2018. For his master thesis “The effect of convergence on innovation output: A quantitative analysis of the smart home industry” he was awarded the first place of the KIN thesis awards 2018.
He is now a Venture Architect at Bitrock Digital Partners, a Corporate Company Builder supporting businesses in developing new digital products and business models.
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