Studying the innovation dynamics of Smartphone.
Samsul Arefin Riffat, ID – 1611274042
Innovation in its modern meaning is "a new idea, creative thoughts, and new imaginations in form
of device or method". Dynamic is the way in which things behave, react, and affect each other.
Therefore, innovation dynamics means how a new idea or creative thought behave, react and affect
in the globally connected market.
Smartphone has begun a new era of innovations focusing on it. New industries has started their
journey because of smartphone. Smartphone’s journey did not started very long ago.
Approximately 28 years back modern smartphone began its journey with the simple though of
making life easy and wireless. 20th century has seen revolutionary changes because of smartphone.
This magical device has boomed economy that no electrical device has ever made.
As human beings are driven by incentives, there is tendency of looking for better products to buy
at lower price to keep increasing consumer surplus. Vice-versa, producers are driven by the profit
incentives; to increase it; producers are in a race to offer better quality products at lower cost. That
is why producers always introduce new methods at a lower cost to gain market control over other
companies. In addition, to gain the market control is not easy. Because to sell products at lower
cost means loss, but price could be reduced by the help of yearlong Research and Development
(R&D). R&D refers to innovative activities undertaken by corporations or governments in
developing new services or products, or improving existing services or products. Therefore, by
studying the dynamics of the product it is possible to give better product at a lower cost.
Consumer surplus is an economic measurement of consumer benefits. Consumer surplus happens
when the price that consumers pay for a product or service is less than the price they are willing to
pay. It is a measure of the additional benefit that consumers receive because they are paying less
for something than what they were willing to pay. A consumer surplus occurs when the consumer
is willing to pay more for a given product than the current market price. Producer surplus is the
difference between how much a person would
be willing to accept for given quantity of a
good versus how much they can receive by
selling the good at the market price. The
difference or surplus amount is the benefit the
producer receives for selling the good in the
market. A producer surplus is generated by
market prices in excess of the lowest price
Figure 1: Consumer & Prouder Surplus
producers would otherwise be willing to
accept for their goods, as shown in Figure 1.
If producer succeeds to increase the
willingness to pay for the product by
increasing the quality, preferably without
incurring additional cost, and offering the
product at the same price like before, more
consumers will likely buy the product. As a
result, both the consumer and producer surpluses will increase simultaneously as shown in Figure
2.
To increase both consumer and producer surpluses simultaneously, the challenge is to increase
the quality (Q) and reduce the cost (C), appears to be conflicting. There could be four different
combinations of these important variables as shown in Figure 3.
Best
Good
Q  C
QC 
Acceptable
QC
Avoid
QC
Figure 3: Figure 3: Four different plausible scenarios
Figure 3: Four different plausible scenarios
Patent
Quality, Q
Cost, C
Plausible Scenario
Xiaomi


Best
OnePlus


Good
iPhone


Acceptable
Blackberry


Avoid
Figure 4: Quality, Cost and Plausible Scenario Comparison
The Best Plausible Scenario is to increase the Q (Quality) and reduce the C (Cost). The second
and good plausible scenario is to increase the Q (Quality) and the C (Cost) remains same. The third
plausible scenario, which is Acceptable, is increase the Q (Quality) double and remain the C (Cost)
as it is. The one that should be avoided is the fourth one, where Q (Quality) increases as well as
the C (Cost).
Figure 3, four different plausible scenarios relates with the market economy of smartphone
industry. It is seen that good phones are getting cheap and cheap phones are getting good. It
means that the smartphone’s quality are getting better by better and the price is falling. There are
phones that has improved quality but the prices are within the limit.
The progression of usage in the smartphone industry has been possible because of the added
intellectual assets in smartphone and the processes to produce. Because of this, the quality of
smartphone goes up and the cost keeps falling. Like any other product, smartphone also is a
collection of features, shown in Equation (1). Features of smartphones are camera, display, touchscreen, speaker and OS (Operating System) etc. The perceived utility affecting the willingness to
pay (WtoP) of a product is summation of utility created by each of the features as shown in
Equation (4). Of course, the utility of a feature, U(fi ), thereby the total utility of a product Tu is
subjective, which depends on individuals, purposes to be served and also the time. In improving
the product, often the practiced option is to keep adding new features and improving existing ones.
There is no doubt that the addition of new features, increasing the value of N, increases the quality
and the cost. However, the enhancement of existing features, as shown in Equation (2), has the
potential to improve the quality and reduce the cost simultaneously.
1)
f1, f2, …, fN
2)
f’I = fi+Δfi
3)
Tu = ∑U(fi)
4)
WtoP = f(Tu)
These equations can be interpreted in smartphone. As in the table below, in the year 1983-90,
Mobile Calling was a feature, f1. As time progressed SMS, Games included as features f2 and f3.
In addition, the new feature set is f’1 = f1 + f 2+ f3. These is how all the other features are added
with the older features.
Year
Change in Features
1983-90
Mobile Calling
1991-94
SMS, Games
1995-98
E-Mail, Vibrate Alert, Color Screen
1999-02
WAP, Tri-Band, Video Calling, GPS Navigation, Predictive Text, Camera,
Poly Graphic Ringtones, MP3 Player, Bluetooth, Memory Card, MMS
2003-06
Real-tone Ringtone, Augmented Reality, Wi-Fi,, Quad Band, Water Proof
2007-10
NFC, Captive Touch-Screen, Mobile Apps, Wireless Charging
2011-14
Voice Control, Dual Lens Camera, Facial Recognition, Fingerprint Scanning,
Full HC Screen, Heart Rate Monitor
2015-18
Iris Scanner, Apple/Android Pay, Bezel-less Display, Notch, In Display
Finger-print
Figure 5: Changes in Features in the mobile phones
The smartphones offer everything that human being could think of. Waterproof, shockproof, unimaginable camera quality, fast charging, finger print reader, facial recognition, iris scanner, heartrate monitoring system and many more, as shown in Figure 5. Now it is a question that how did
the manufacturers reduce this much price by offering all these great features. The answer is the
reduction of material and labor need, not only cost decrease, but also the quality improves.
Moreover, feature improvement also leads to greater utility. Exploitation of this opportunity out
of science and technology progression is the key to attain the goal of increasing both consumer
and producer surpluses simultaneously, through having favorable change in Q and C.
Battery is one of the most prominent feature in smartphone. Battery life has improved at a point,
people did not think of it. Intellectual assets has made it possible to improve the battery life.
Huge battery life is being provided to smartphones at a lower cost. Again bigger battery life
means more time to charge. It can be said recharging phone’s battery is the place where modern
phone industry has done a unthinkable job. With the help of fast charging it is possible to charge
a phone battery less than an hour, which was absurd a few years back. From the figure 6, it seen
that how the battery life and recharging time hjas changed over the year.
Figure 6: Battery Life & Recharging Time in Smartphone Industry
The screen resolution on smartphones are getting all time high. And looking at them we can
easily say that they are nothing like what phones were ten years back. The screen resolution are
getting better and cheaper.
Unit sell in millions
Smartphone unit shipments worldwide by screen size
800
700
600
500
400
300
200
100
0
2018
2019
2020
2021
0"-5"
150
75
55
40
5"-5.5"
350
305
270
235
5.5"-6"
650
655
675
710
6"-7"
295
465
555
615
Figure 7: Smartphone unit shipments worldwide by screen size
In figure 7, the display of bigger size is getting popularity. The phones of second generation were
mostly less than 4 inches. But due to the advancement of the technology and intellectual assets,
the price of making display is getting cheaper and the induistry can provide bigger displays by
keeping the price low. And in the future the price will decrease more and the usuage of bigger
display will be seen.
Through process innovation, product quality is also improved and cost is reduced. Increasingly,
the role of science of technology (IA) is increased in production process so that effectiveness and
precision are improved, defects, and material as well as energy needs are reduced, and labor
requirements are reduced too. As a result, process innovation plays a vital role in increasing the
quality and reducing the cost, consequentially increasing both consumer and producer surpluses
simultaneously.
Utility or perceived value
relating to WtoP
Labor requirement to
produce and use
Raw material and
energy need
Intellectual Assets
Intellectual Assets
Intellectual Assets
Figure 8: Effect of increasing role of intellectual assets in improving existing
features, as well as adding new features.
Innovators keep enhancing underlying technology core, and taking the advantage of it in
improving the product quality and reducing the cost, as a result products keep penetrating deeper
into the society through different customer segments as shown in Figure 8.
Maturity of Technology and
Innovation
Growth of Technology core, leading to
maturity of innovation (product)
Time
(c)
(a)
(b)
Figure 9: (a) typical S-Shaped life cycle of innovation and its underlying technology
core, (b) different segments of the customers likely to be buying the product, and (c)
different segments of the customers keep responding to the product adoption along with
the progression of the product, driven by the progression of the underlying technology
core, as quality keeps increasing and cost keeps falling.
Sustaining Innovation in a Competitive Market: Once an innovative product starts showing
possibility of profitability and growth, it starts experiencing two major forces: 1. Competition, and
2. Externality effect. The competition force shows up in the form of (i) Replication, (ii) Imitation,
(iii) Innovation, and (iv) Substitution, at a later stage. The externality effect comprises of (i)
Complementary offering products from 3rd parties, (ii) Network effect, and (iii) Information and
experience effect. The competition force affect the willingness to pay (WtoP) of the product
negatively, drifting it downward. On the other hand, the externality effect plays a positive role. For
example, due to the offering of complementary products from 3rd parties, the perceived value of
the innovation keeps going up, affecting WtoP positively. Similarly, network effect keeps
increasing the value of the product with the growth of customer base of the product. On the other
hand, once the information gap about the utility of the product is reduced and potential customers
get a chance to experience the product, the WtoP increases.
Ingeneral, it has been found that the resultant effect of competition andexternality on the WtoP of
an innovative product keeps WtoP drifting downwardas time progresses as shown in Figure 10.
Due to maturity of
technology core, product
improvement flattened out
Effect of Externality:
(ii) Network effect
Resultant force
on Willingness
to pay (WtoP)
(iii) Progress in
Competition force:
(i) Replication
Willingness to Pay (WtoP)
Willingness to pay (WtoP)
(i) Complementary goods
and services.
Successive better
versions are released,
preferable at decreasing
cost to counter the
market force
With saturation,
substitution products
starts growing
(ii) Imitation
Time
Figure 10: In a competitive market,
WtoP of innovative products keeps
drifting downward.
t0, t1,
t2,
…
Time
tn
Figure 11: To counter the drifting WtoP,
the innovator keeps releasing successive
better version
As successive releases are better, often priced less
powered by the decreasing cost, the customer base of
the product keeps increasing. This is a key success
factor to profit from innovation in a competitive
market economy. As a matter of fact, irrespective of
the greatness of the idea of the substitution and the
strength of the underlying technology core, every
innovation shows up in the market in a rather
primitive from, resulting in producing loss-making
revenue from a small customer base. For example, the
phones back in the 20th century was in primitive form.
Figure 12: Sales pattern of successive
versions of iPhone, shaped by market
them around. As time progressed, the phone became
forces
slimmer, lighter and smart. The cost of the phones went down as it size decreased. Even Steve
The phones were huge. It was very difficult to carry
Jobs’ magical iPhone could not escape this reality. Within just one year of the release of the first
version, the sale came down to zero. During this time, replication of iPhone based on crack version
of iOS started to show up, at a far less price. Similarly, Samsung and others started offering
imitating iPhone features such as multi-touch user-interface by adopting Android OS. 3rd Apps
and also the rapid expansion of mobile Internet play complementary role to iPhone as well. To
counter the resultant market force and create appeal among growing number of customers, Apple
kept releasing successive better versions, often at the same price, or slight price increase.
Substitution Causing Disruption: Although, iPhone yet to experience the emergence of strong
substitution product, but more or less all innovations eventually face disruptive effect due to
substitution. However, not all substitution ideas grow as strong force causing disruption to target
products and associated industries. For this reasons, more than 90 percent start-ups even in Silicon
Valley fold up within first three years.
For the substitution to succeed there should be
Customers of existing product.
a strong non-consumption of the existing
product, to be substituted. Non-consumption
Customers cannot consume it,
badly waiting for substitution
(non-consumption)
is about a potential customer segment of the
incumbent product, whom could not consume
the existing product. There could be several
factors
starting
from
cost,
Do not even dream of
consuming
technology
complexity, environmental effect, portability,
or needed infrastructure affecting the nonconsumption. Ideally, the society should be
Figure 13: Decomposition of potential market of
substitution product, likely to grow as a disruptive force
to existing product and industry.
decomposable in three concentric circles with respect to the product, which is targeted to be
disrupted, as shown in Figure 13. Here are number of characteristics associated with the growth of
substitution as a disruptive force:
(i) The potential market should be decomposable into 3 concentric circles, with a strong
presence of non-consumption, as shown in Figure 13.
(ii) The substitution product should be around an emerging new technology core, which is
at stage of growth in its life cycle.
(iii) Irrespective of the greatness of the idea and strength of the technology core, initial
emergence of substitution would be in primitive form causing a very faint substitution
effect on the targeted exiting product.
(iv) Primitive versions should create willingness to pay among non-consuming customers
to start generating revenue and offering feedbacks supporting subsequent development;
such primitive product will create very little wiliness to pay among a small group of
customers generating loss-making revenue.
(v) The underlying technology core should be amenable to rapid growth (as well as
expansion by integrating with complementary technologies) through R&D leading to sharp
improvement of quality (Q) and reduction of cost (C)—consequentially increasing sale and
turning loss making revenue into profit.
(vi) Quality improvement and cost reduction will capture the non-consumption segments
and will also penetrate the core market of the existing product, causing disruption, and will
expand to the periphery creating larger market than before.
The journey of creating disruptive effect by pursuing substitution is often risky as well as long.
Moreover, opportunities of offering substitutions, causing disruption, often take long time to
emerge. Such time duration varies. For example, it took more than 100 years for Electric Vehicle
to grow as a substitution posing disruption threat to gasoline engine based cars. On the other hand,
within just 15 years, portable video camera faced substitution effect from smartphones. Similarly,
the portable computer storage industry has experienced disruptions four times within a span of 40
years, caused by successive waves.
Effect of Technology and Innovation: It is true that technology and innovation create wealth,
and expands trade by offering better products at lower cost, consequentially creating both
consumer and producer surpluses. Nevertheless, it also kills jobs and negative affect trade by
enabling better performing producers to acquire monopolistic market power through the
accumulation of technology and innovation capability in offering better products at lower cost,
than what competitors can offer. Innovation also transforms the value and market of human
competence, and raw materials, as shown in Figure 14 , which is likely to accelerate in the age of
the fourth industrial revolution (4IR). Particularly software and network centric innovations (as
cost of replicating software is zero, and perceived value keeps increasing with the growth of
customers due to network effect) are powering such transformation with far greater scale, speed
and scope than seen ever before. To succeed in creating innovation economy, the production and
commercialization of Intellectual assets (or intellectual properties), as product and process
features, is vital.
Market value of
certain skill sets
Market value of raw
materials
Market value of labor
Time
Time
Time
Figure 14: Technology and Innovation Keep Transforming market values of labor, raw materials and skills.