The complexity theory suggests for firms in rapidly changing industries to find a sweet spot at the edge of chaos with a balance between rigidity and flexibility, by devising a set of simple rules to selectively capture and capitalize on emerging opportunities. However, a key limitation of this framework lies in the difficulty to determine what constitute a good set of rules in setting each evaluative factor and the optimal quantity of rules to follow. In addition, performance is defined by growth, which might lead to firms overly focusing on exploring new opportunities without a stable foundation that threatens its ultimate survival. The framework still needs to be used in complementary with internal analysis of the firm’s core competency and external analysis of the industry forces in order for the firm to enjoy sustained competitive advantage and a long term profitable position. I will be illustrating the above-mentioned limitations with application to a recent case – the fall of LG Electronics’ mobile phone division as the first major smartphone manufacturer to completely withdraw from the market in April 2021.
The smartphone industry is by no doubt a fast-changing and unpredictable one. Product innovations have been progressing by leaps and bounds over the years on exterior design like screen size, display resolution, colour and motion graphics, as well as hardware features including camera quality, CPU performance and battery life. Just like the theory of revolution, in between longer periods of relative stability, paradigm shifts of rapid changes are led by strong innovative industry players like Apple and Samsung, with the remaining pie divided amongst smaller brands trying to follow the trend-setters or offer more basic and affordable models like Xiaomi and Oppo.
Yet, LG Electronics has been a risk-taker who constantly experiments with new innovations for its smartphone models before it could no longer sustain a profitable business and shut down the division. However, in the home appliances industry, LG Electronics has maintained its position as one of the largest TV manufacturers, occupying around 13% of global market share, just after Samsung at 17.8% in 2019 (Laricchia 2022) Both companies have highly competitive product lines across a variety of consumer electronics including refrigerators, washing machines, and air conditioners. LG Electronics also ventured into the smartphone industry in 2010, yet after nearly a decade, it announced its withdrawal with its phone sales less than tenth of Samsung and made a loss of US$4.4 billion over the last six years. (Jonnalagadda 2021) LG’s failure to replicate its success in the home appliance industry into the smartphone industry could be because the latter is a more rapidly changing and unpredictable one, where the extent to which the complexity theory is applicable can be discussed with regards to the following limitations.
Limitation 1: Difficulty in Determining Simple Rules
Applying the four categories of simple rules to the smartphone industry, boundary rules could be used to decide whether to capture or ignore new opportunities such as whether to follow when competitors launch new features such as Face ID, or simply become the first-mover in response to a new customer need, like offering telephoto and wide-angled lens when demand for more professional photography on mobile started to arise. How-to rules could then be used to govern the new product development process, such as extensivity of consumer research and quality testing before launching to market. Timing and exit rules could refer to how frequently should the firm upgrade its existing smartphone models or add completely new features, as well as when should it abandon the feature if market response does not turn out well. Rules cannot be too general or too specific, too many or too few, and rules that work in the context for one company might not work in another in the same industry. However, the framework does not provide a clear guideline to devise an effective set of simple rules.
Limitation 2: Simple Rules Does Not Guarantee Successful Take-Off
Simple rules can be used to simply decide on whether to take up an emerging opportunity, yet it might not guarantee success. As outcome of product innovations also depends heavily on marketing capability, whether a feature can be well-received by the market also cannot be predicted well using simple rules.
LG Electronics has adopted a simple boundary rule of being the first-mover in adding innovative features to their phones. Yet, being the first in a consumer technology might not be as important as being the best. The LG Prada, launched in 2006, was actually the first mobile phone with a capacitive touchscreen even before the iPhone. Yet it was the iPhone that was remembered in history to have radically revolutionized the smartphone industry. The LG Prada had its name giving a premium impression yet was not made up to a designer quality, with plastic finishing, no Wi-Fi capabilities, very little internal storage and battery capacity. (BrownC. 2020) 10 years later in 2016, the LG G5 was the first to introduce an ultrawide angle camera, a major innovation that influence later products in the industry which since then become a staple feature on the latest phones, yet the lead has been completely taken over by Samsung. (Villas-BoasAntonio 2019) The failure of these two LG models shows that merely adopting a simple rule of being the first-mover with just one piece of revolutionary technology might not guarantee success. It might even lead to competitors taking advantage of the innovation, perfecting and scaling up the idea with greater success later. Although this could have been mitigated by adding more rules when taking up a new innovative opportunity, it is again difficult to determine the quantity and quality of other features besides the key innovation that need to be scaled up, or the level of internal technological capability compared to competitors whose in-house R&D progress information could be hard to obtain. Having too many rules also limits flexibility of the framework, increasing costs and resources needed to launch innovative models, increasing time-to-market and eventually loss of opportunity to competitors.
LG had extraordinary ideas but failed to execute the concepts or invest in marketing. It had also experimented many wild features that were not picked up by its competitors, neither did the customers buy into them. The LG G8 launched in 2019 included a vein unlock feature where users hover their palm over the phone, while the LG Wing launched in 2020 has a rotating design into dual screen mode. But none of these received extraordinary response. The rotating dual screen of LG Wing can actually be seen as a similar idea with Samsung’s Galaxy Z Fold. Yet Samsung invested heavily in featuring the model in Korean dramas reaching global audiences as well as marketing on the sense of nostalgia towards clamshell phones in the past. LG experimented with cool innovative features every year, however if something did not work, they completely changed direction and tried out another experiment in the next year. Although it had this timing and exit rule of constantly innovating with new features every year and drop the feature if it did not work out, market response to non- essential features like vein unlock and rotating dual screens could require extra marketing efforts and consumer tastes could also be difficult to predict by a set of simple rules.
Limitation 3: Focusing on New Opportunities Could Threaten Survival
Simple rules could guide firms to decide whether to take on new emerging opportunities and performance is defined by growth. Yet overly focusing on exploring new opportunities could threaten the firm’s fundamental survival.
Innovative feature might only be useful to a small group of consumers. It might still be sustainable if the company is making money elsewhere like how Samsung has its money- making flagships, but tries new features like foldable device in other product lines. Xiaomi also has a Mi Mix series where it specifically and consistently try out innovative features and wild designs. In contrast, LG didn’t have a consistent money-maker and its main line was the fun and risk-taking one, leading to continuous losses suffered by the smart phone division. LG failed to find its sweet spot and strike a balance between some consistency and risk- taking innovations which was hard to determine.
Another critical shortcoming that threatened its survival was the failure to secure stable chip supplies for its smartphones. Unlike Samsung that has great in-house capability in manufacturing key components, advanced displays and memory chips. LG lacked in-house chip supply which forced it to battle with Chinese manufacturers like Xiaomi and Oppo for technical support and resources from mobile processor developers such as Qualcomm. Due to LG’s low sales volume and losses in consecutive years, it could become difficult to get good deals from the component makers. Its high dependence on external chip supplies created high supplier bargaining power and a loss cycle. This leads to my recommendation that the complexity theory and its set of simple rules need to be used in complimentary with internal analysis of the firm’s core competency and external analysis of the industry for its critical survival, followed by sustained competitive advantage and a long term profitable position.
Recommendation: Complementary Frameworks
According to LG’s official statement, its strategic decision to exit the incredibly competitive mobile phone sector will enable the company to focus resources in growth areas such as electric vehicle components, connected devices, smart homes, robotics, artificial intelligence and business-to-business solutions, as well as platforms and services. (LG 2021)
LG’s core competency lies in its innovative capacity, a function of the knowledge and skills of its engineers and designers and the way they work together. (HittM., 2008) Relooking at LG’s success in the home appliance sector, product innovations it adopted especially when entering emerging markets like India were highly catered to the local needs. Power supply disruptions were very common in the country, hence LG equipped its home appliances with circuits that could withstand dramatic voltage fluctuations. Its air conditioners also has unique filtration system to filter high levels of particulate pollution in metropolitan cities. (RamaswamyKannan 2007) However, in the smartphone industry, LG faced fierce rivalry pressure from Samsung and Apple in the premium segment, Chinese brands at the more affordable tiers and failed to differentiate itself with innovative features it had been experimenting. LG’s innovation in the home appliance industry catered to geographically specific conditions while innovative features it experimented in its smartphones like vein unlock and rotating dual screens were less essential and not backed by strong marketing efforts. It also failed to capture the first-mover advantages in capacitive touchscreen and ultrawide angle camera with an overly simple boundary rule lacking overall effective specs expected by consumers or supporting technology to sustain advantage with the first-to-market position and were easily overtaken by Apple and Samsung that eventually scaled up the initial innovation.
Nevertheless, LG’s smartphone division should have been credited for constantly striving to innovate from not being “just another Android phone”. Given the fast-moving and unpredictable industry nature, even the complexity theory that aims to strike the balance between flexibility and structure has limited applicability. Rules as simple as being the first- mover might not guarantee successful take-off and what constitute as essential or non- essential feature is highly subjective and dependent on marketing capabilities, where consumers’ reception cannot be easily predicted with a set of simple rules. Therefore, if LG could turn back in time, it should have strategized better through internal analysis of its key technological resources if it had the capacity to constantly develop quality camera on its mobile phones as a sustained competitive advantage, instead of launching the ultrawide angle lens first-to-market, yet with the innovative idea easily taken away and perfected by other industry players like Samsung. LG could have also reduced its dependency on external players such as securing a stable chip supply so that it would not end up competing with cheaper and better-selling Chinese brands on supply of essential components from suppliers with high bargaining power.
Moving forward, despite closure of its mobile division, LG Electronics owns the third largest number of LTE and 5G patents in the world that are being eyed on by Samsung and other non-practicing entities. (Byung-yeulBaek 2021) These patents are VRIN resources valuable in the long term evolution of LTE and 5G networks where LG can continue to protect and capitalize on.
All in all, simple rules have to be used in complementary with internal analysis of the firm’s core competency and external analysis of the industry forces in order for the firm to enjoy sustained competitive advantage and a long term profitable position which determines its ultimate survival.
Bibliography
Brown, C. Scott. 2020. The LG Prada was the first capacitive touchscreen phone, not the iPhone. February 15. Accessed 2020. https://www.androidauthority.com/lg-prada-1080646/.
Byung-yeul, Baek. 2021. Samsung, NPEs eyeing LG’s 5G patents. April 27. https://www.koreatimes.co.kr/www/tech/2021/04/133_307892.html.
Hitt, M., Hoskisson R. & Ireland, R. 2008. Understanding Business Strategy: Concepts and Cases. Cengage Learning.
Jonnalagadda, Harish. 2021. It’s official: LG is exiting the smartphone business. April 5. https://www.androidcentral.com/its-official-lg-exiting-smartphone-business.
Laricchia, Federica. 2022. Global market shipment share held by LCD TV manufacturers from 2008 to 2019. February 21. https://www.statista.com/statistics/267095/global-market-share-of-lcd- tv-manufacturers/.
LG. 2021. LG Newsroom. April 5. https://www.lgnewsroom.com/2021/04/lg-to-close-mobile-phone- business-worldwide/.
Ramaswamy, Kannan. 2007. “LG Electronics: Global Strategy In Emerging Markets.” Thunderbird School of Global Management.
Villas-Boas, Antonio. 2019. Samsung’s killer new Galaxy S10 camera feature has been used by another major smartphone maker since 2016. March 13. https://www.businessinsider.com/samsung-galaxy-s10-isnt-first-phone-with-ultrawide- camera-2019-3.
Leave a comment