Communications of the ACM

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Using the Thread-Fabric Perspective to Analyze Industry Dynamics

By Dongback Seo, King-Tim Mak
Communications of the ACM, January 2010, Vol. 53 No. 1, Pages 121-125
10.1145/1629175.1629205
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Rapid advances in technology pose severe challenges to organizations that are dependent on their technology for day-to-day operations as well as strategic renewal. For example, one major challenge is the decision of which new technology to adopt and when to adopt it. If an organization implements a technology too early and its industry takes up another technology later as the standard, the organization will have wasted resources and must expend more in order to switch or make its technology compatible. If the organization waits for a standard to emerge, it will lose any benefits of being the first mover. Organizations struggle to predict the shape of tomorrow's industry, especially more dynamic industries like wireless communications.

Current business theories are limited in their ability to explain phenomena happening in these dynamic industries. They are also weak in their ability to predict the totality of these types of industries. Theories like the resource-based view of the firm¹ and dynamic capabilities⁸ can assess an individual firm's competitiveness and analyze competition between one firm and another under preordained and well-ordered industrial structures, but they cannot explain the total shape of an industry and the positioning of firms within the industry. For example, the analysis and comparison of organizations in the wireless industry, such as Nokia, Samsung, Qualcomm, Vodafone, Hutchison, and Verizon, can assess a company's resources and capabilities and its superiority over another in its resources or capabilities. But these theories do not explain the whole picture of the industry, why companies are pursuing different technologies, why and how they ally with one another, or how companies with fewer resources or capabilities can compete with those with more, for example.

They also fail to account for how organizations and industries change constantly through internal and external forces. In fairly static industries like the traditional auto industry, companies operated on the same stable supply chains and other systems for decades, thus it was fair to detach two or more organizations from the same shared industrial context to compare them. However, we cannot separate organizations from their industrial context in current dynamic industries like information technology, because organizations and the industry in which they belong co-evolve rapidly by affecting each other. None of the standard business theories can give us clear answers to how, for example, Qualcomm and Korean electronics companies, that started with few resources, capabilities and market share, could create and then expand their territory in the GSM-dominated wireless industry led by Nokia.

More broadly, the nature of modern business competition appears to be undergoing a fundamental change. To explore the new industrial dynamics, we use the intuitive ideas of threads, fabric and weaving to develop a perspective which promises to greatly facilitate the description and analysis of highly competitive and dynamic industries such as the wireless industry. The Thread-Fabric view perceives organizations and industries as organic entities rather than as rigid and mechanical units. The proposed perspective also differs from existing theories in that it allows a way to observe industries and predict the future not only at the level of individual firms but also from the scope of entire industries. For industry, we hope this theory can support managers and decision-makers to understand the fast-changing business environment and build strategies and tactics to achieve their business goals. For academia, we hope our proposal shows a new way to analyze and understand how industries transform in this day and age.

Here, we describe our framework and clarify its details by applying it to the example of the global wireless industry. We use this framework to analyze current dynamics in the wireless industry: the fight for third-generation technology standards, and within that, the competition over wireless internet platform standards. We also discuss the possible use of this framework to predict future directions in industries.

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Introducing the Thread-Fabric Perspective

Fundamental components of the proposed perspective are as follows:

• Threads – link-ups of value-adding activities. Threads refer to a specific relationship between specific players; they encompass all the traditional relationships in a supply chain or value network but can include relationships beyond suppliers and buyers.⁶ For example, a wireless service provider can extend multiple threads. One thread is in its supply chain, as the company seeks more competitive handset suppliers to improve the price or quality of its handsets. Another thread could extend to other wireless service providers to invite them to be partners to expand coverage through roaming agreements. A third thread extends to the government when the wireless service provider tries to persuade the government to influence other nations to use the company's technology.
• Fabric – the totality of the threads that constitute an industry. Fabric shows the whole picture of an industry, whether regional or global, through the totality of threads. For example, the fabric of the U.S. wireless industry would be shown with an analysis of each thread pursued by players in the U.S. wireless market such as wireless service providers, handset manufacturers, content providers and governments.
• Weaving – the process by which different threads compete or reconcile with each other to form the fabric of an industry. Weaving answers the question of how different threads are related to each other. For example, Verizon initiates one thread made up of Samsung handsets built with CDMA2000 chips and Qualcomm's BREW as the wireless internet platform. A similar thread is initiated by AT&T, with Nokia handsets, WCDMA chips, and JTWI internet platform. These two threads weave together as competing threads in the fabric of the U.S. market.

The Thread-Fabric perspective may be generally stated as follows: business competition should be seen as the players striving, with and against one another, to propose threads to their potential partners, and maneuvering to weave their threads into a pattern agreeable to the market, thereby shaping the fabric of the industry to their advantage.

To apply the proposed perspective, we must first:

1. Identify major players and understand their business environment, that is, the economic and political forces affecting the major players;
2. Comprehend the value threads proposed by these players and evaluate whether the threads will fit the needs and desires of the market; and
3. Analyze the players' maneuvers with and against others' value thread proposals to form and dissolve partnerships, so as to weave value threads into the market fabric and thereby shape the emerging fabric.

More competitive organizations are those that have a better conception of the right fabrics for the market and are more agile and capable in weaving threads to shape the market fabric.

One of the significant differences about this perspective from other theories is that it analyzes an organization in the context of the industry with a two-level cyclic approach, instead of detaching it from the industrial context and comparing its resources and capabilities in isolation. The two levels are the organizational level (understanding an organization's proposed threads and its resources and capabilities) and the industry level (the weaving of those threads and analyzing the potential evolution of the industry fabric as a result of inter-weaving the threads).

We argue that this kind of two-level analysis is necessary in order to fully understand organizations in dynamic industries such as information and communications technologies. Rapid changes in these industries force organizations to change their strategies and behaviors quickly, which in turn shape the industry, so analysis of organizations cannot be separated from analysis of the industry. Organizations and the industry in which they belong co-evolve together. Without cyclically analyzing organizations and the industry back and forth, it is impossible to predict organizations' behaviors and the evolution of the industry. This is especially important since the revolution of information technology in the 1980s and the Internet in the 1990s. Information and communications technologies (ICT) are now embedded in all industries, spreading the dynamism of the ICT sector into most industries.

The evolution of the wireless communications industry is a good example to illustrate how the Thread-Fabric perspective can be used to analyze organizations in a dynamic industry. This paper will apply the perspective to analyze the evolution of the global wireless communications industry and players in the industry.

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Case Study: Competition in the Wireless Communications Industry

The market for the first generation (1G) of wireless communications based on AMPS (Advanced Mobile Phone Service) technology was very limited due to high prices. Moreover, the AMPS networks were isolated because the wireless service providers (WSPs) and host countries adopted different versions of AMPS. Thus, the fabric of the 1G wireless communications industry consisted of separate and distinct value threads of AMPS.

The gradual expansion of wireless service and the maturing of digital technology prompted the wireless industry to develop second generation (2G) digital technology and migrate commercial service to 2G. Within the context of forming the European Union (EU), the Europeans agreed on the desirability of a common 2G wireless technology and market and thus developed GSM. Meanwhile, Japan remained insular and chose to develop its own 2G wireless technology PDC (Personal Digital Cellular). The U.S. did not strongly push the development of 2G, because wireless was not a compelling alternative given its sophisticated landline networks, and because the industry was distracted by the imminent breakup of AT&T.

The proposed thread for 2G by the European GSM camp was more attractive to the rest of the emerging global wireless market than U.S.'s TDMA and Japan's PDC, because it was explicitly designed for roaming and inter-operability. Furthermore, the full scale adoption of GSM in Europe quickly drove down costs. As a result, the global fabric for 2G was mainly woven by threads from GSM players (vendors and carriers), while the threads of the TDMA and PDC camps formed only small segments. South Korea later launched another 2G technology, CDMA, but these threads were mostly limited to the Korean, and to a lesser degree the U.S., markets at the time.

Currently, the 2G wireless market is reaching maturity in developed countries while still being rolled out in the rest of the world. The wireless industry is now quickly moving towards third-generation (3G) technology 3G, which adds data services to voice capability. By promoting 3G technologies and services, wireless service providers can increase ARPU (average revenue per unit); network vendors can benefit by helping carriers upgrade their networks to 3G; handset manufacturers can sell a new generation of phones and other mobile devices; and content and application providers can expand their market horizon. With the prospect of ultimately serving more than a billion users globally, 3G means really large revenue.

The fight for dominance in the 3G wireless market started around 1998 with the demarcation of the main 3G technologies – WCDMA technology promoted by GSM players and CDMA2000 technology promoted by Qualcomm and its cdmaOne partners. CDMA2000 is more effective than WCDMA in bandwidth usage and other aspects, and the migration from 2G cdmaOne to 3G CDMA2000 is a natural migration. In contrast, because of the switch in air-interface technology, migration from 2G GSM and TDMA to 3G WCDMA is not so natural, requiring a new spectrum and totally new handsets and networks. Thus, the threads proposed by the CDMA camp are more competitive technologically, but the threads proposed by GSM players are more viable in the market due to their 70% share of the global market.

The originally conceived 3G fabric which underlay the WCDMA proposal is that with the EU and Japan's DoCoMo joining forces, WCDMA would dominate two of the three continents (hence the world) and leave CDMA2000 as a niche player. Accordingly, the originally conceived weaving of 3G value threads was to have DoCoMo lead the migration to WCDMA and then expand WCDMA to the U.S. Indeed, DoCoMo did invest significantly in AT&T.⁴ Lastly, aligning the GSM vendors and Japanese vendors (such as merger of Sony's wireless business with Ericsson's³), DoCoMo would move the GSM customer base gradually (via the 2.5G technology of GPRS) towards 3G.

However, the growing success of CDMA and the effectiveness of its migration to 3G are posing threats to GSM. South Korea has rapidly transitioned to 3G with resounding success in its market. The ease of CDMA's transition to 3G has motivated developing countries such as China and India to add CDMA technology to co-exist with GSM in their markets. Although the CDMA-based threads still weave a considerably smaller share of the global wireless fabric, the speed of its movement to 3G and the potential threat this implies is spurring GSM players to move faster to develop their 3G solutions than they might otherwise. Without this motivation, it's likely that GSM market would move more slowly, because its migration to 3G WCDMA requires so much more investment of all kinds.

From the point of view of CDMA players, they do not want their value threads to create a completely disjoint fabric from those of the GSM market. After all, why would they want to miss out on what is still currently 70% of the global wireless market? If Qualcomm, Samsung, and other CDMA2000 partners chose to pitch CDMA2000 antagonistically against WCDMA, then 3G would unfold as two competing fabrics, to the detriment of the profit potential of the CDMA players. They have wisely chosen to pursue a different path through what appears to be a three-pronged strategy:

• A. Highlight the future advantages of CDMA2000 and push to enlarge the CDMA customer base. Indeed, CDMA is now a major player in all markets except the EU (such as KDDI in Japan, Reliance in India, Unicom in China).^2,7
• B. Push the migration to 3G in current CDMA markets in Korea, U.S., and Japan to: show the world what CDMA2000 can do, and be the first to master 3G repertoire and achieve economy of scale.
• C. Leverage items (A) and (B), and maneuver to participate in the weaving of WCDMA value threads. For example, Qualcomm is now working with DoCoMo on WCDMA networks,⁵ and Korea's LG is the main handset supplier to the WCDMA operator 3 in Europe. These are extensions of threads woven starting at 2G. Korean CDMA handset vendors now export more GSM handsets than CDMA handsets because of the size of the GSM market (See Exhibit 1 for more detail). This is one example of how the Thread-Fabric perspective can accommodate organic rather than rigid and mechanical relationships.

Basically, the strategy is to make CDMA2000 so successful that WCDMA has to include it in its value threads in order to be successful. To the extent that this strategy turns out to be successful, the 3G fabric will not be shaped as the WCDMA camp originally envisioned.

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The Case of the Wireless Internet Platform

Even among CDMA2000 players, there are conflicting interests. We have seen the fabrics that are being proposed; let us look more closely at specific weaving of threads in the competition for 3G.

A wireless Internet platform (WIP) is the middleware which mediates between mobile data applications and content and the functionality of the devices and networks. The CDMA2000 camp sees the development of WIP as a significant maneuver to push 2G towards 3G. If the migration to WCDMA is slow while the CDMA2000 market flourishes with multitudes of applications and content running on a standard WIP, then the laggard WCDMA markets will be under pressure to include CDMA2000 players in their value threads. Moreover, the uncommitted 2G markets in developing countries will be more likely to choose CDMA2000 for their 3G future.

The major CDMA players, Qualcomm and the Koreans, do not necessarily agree on the composition of the value threads over which wireless Internet data should be delivered. They have many dimensions of conflicts, held in check by their shared interest in the success of CDMA. For instance, Qualcomm desires to have the WIP and related services integrated with its chips, while the South Korean government wants to control the WIP standard so as to grow Korea's software, content, and hardware sectors.

Qualcomm debuted its wireless Internet platform BREW (Binary Runtime Environment for Wireless) in Korea. Qualcomm persuaded KTF, one of the Korean WSPs, to use BREW in November 2001. It was important for Qualcomm to succeed in Korea because Korea is the biggest and most advanced CDMA market in the world. At the time, Qualcomm also did not have other options because no other markets had the capabilities for wireless Internet.

However, this 3G value thread proposal of Qualcomm and KTF conflicted with the Korean government's aspiration to make the home-grown platform WIPI (Wireless Internet Platform for Interoperability) the single standard in the Korean market and then export it. Indeed, later on WIPI and BREW fought to be adopted by China Unicom as its platform.

Subsequently, BREW was adopted by Verizon and the Latin American subsidiaries of Bell South. Thus the success of BREW became a matter of U.S. national interest. The USTR-Office of the U.S. Trade Representative intervened and caused Korea to delay adopting WIPI as the single standard. This allowed players time to sort out their conflicts and interests, and realign value threads.

After further negotiations between the Korean government and the USTR, it was agreed that the Korean government may mandate WIPI to be used on all new handsets. However, multiple wireless Internet platforms are allowed to co-exist as long as they follow certain specifications on compatibility. When all three Korean WSPs announced their plans to deploy WIPI, Qualcomm announced that they were updating BREW technology so WIPI could be run on the BREW platform as an application.

This episode of players maneuvering to control CDMA WIP illustrates the intricacies of adjudicating conflicts and interests in the process of weaving value threads. Now that the CDMA WIPs have been "harmonized," the question becomes whether CDMA2000 content and services will grow strongly and quickly enough to force themselves onto the WCDMA fabric. This next stage of development will involve even more complex alignments of conflicts and interests among the global players. Korean vendors are ready to supply European carriers with WCDMA phones powered by Qualcomm chips which can run multitudes of applications and contents already written for BREW, WIPI, and Java. Will there be any EU takers?

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Conclusion

Traditionally, value chains based on mechanical supply chains are taken to be pre-ordained, rational, well-ordered industrial structures. However, in modern dynamic industries, the formation and evolution of value threads are disorderly, contingent, and opportunistic. Yet, the threads are still somehow dynamically woven together to shape meaningful fabrics. We hope that this case study has illustrated some of the main advantages of the Thread-Fabric perspective. The Thread-Fabric perspective does the following:

1. It explains the aspirations of organizations.
2. It accounts for change and realignment in a more flexible way than most other business theories. As we have seen, an organization doesn't compete against its current competitors forever, and no single technology dominates perpetually. Technology evolves and organizations compete or co-operate with each other on a fluid, ever-changing basis.
3. It recognizes business activities as organic rather than rigid. In order to survive in the modern dynamic business environment, a company must be flexible.
4. It goes beyond companies to include other kinds of organizations that affect business activities, such as government entities.
5. One of the biggest advantages of the perspective is that it can show the totality of an industry. Analyzing individual threads and seeing how they are woven together as a fabric shows the overall picture of the wireless industry and what it is moving toward. Other theories explain only the competition between organizations. For example, the Resource-Based View describes how individual organizations have unique resources to be more or less competitive than others.

This perspective poses a new view with which to observe industries and predict the future not only on the level of individual firms but also from the scope of entire industries. Organizations can apply the proposed perspective to evaluate their existing threads to determine whether they are competitive or not; to assess their positions in existing fabrics; to predict possible future fabric that is beneficial to them; and to propose more attractive and potential threads to the evolution of fabric. Researchers can also use the perspective to analyze and understand organizational behaviors at the industrial as well as organizational levels in dynamic and complex business environments like business convergence among wireless communications, broadcasting, and computing industries.

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