Ericsson Global Strategy Project


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Group project delivered for a mini elective on global strategy, especially focused on how global firms can leverage their globality.

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Ericsson Global Strategy Project

  1. 1. INSEAD  –  GLOBAL  STRATEGY  ELECTIVE  –  PROFESSOR  S.  RANGAN  (MAY  2012,  12J  MBA)   Leveraging  Globality  at  Ericsson   Turning  local  innovation  into  global  technologies                       Team:  Yumi  Aizawa,  Arnaud  Bonnet,  Martin  Garnes,  Prasanth  Karumanchi      Logo  from­‐M  (copyright  by  Ericsson)      
  2. 2. Index    Ericsson  ..................................................................................................................................................  2  Facilitating  innovation  by  leveraging  globality  –  a  three-­‐tiered  approach  ............................................  5   Decentralized  decision-­‐making  to  empower  staff  to  take  ownership  of  ideas  .................................  5   Organizational  Culture  for  utilizing  global  capabilities  ......................................................................  8   Cross-­‐regional  Sub-­‐networks  facilitates  information  sharing  ..........................................................  10  The  advantages  of  global  innovation  ...................................................................................................  12  Learning  from  Ericsson:  Rolling  out  its  approach  to  innovation  to  other  industries  ...........................  13                            We  are  grateful  to  INSEAD  alumna  Carla  Belitardo  (Ericsson,  Brazil)  for  discussing  the  innovation  process  at  Ericsson  with  us.           1  
  3. 3. “…To  build  our  networked  society,  our  innovations  need  to  be  offered  more  widely  than  to   operators  alone.    We  are  finding  new  ways  to  extend  our  reach.    Today,  we  also  address   sectors  like  utilities,  TV  &  Media…”  (Ericsson  2011  Annual  Report)  Ericsson  Major   innovations   in   communication   methods   have   been   key   to   the   progress   of   society.    The   invention   of   the   telegraph   in   the   1790s   was   followed   by   the   invention   of   the   telephone  in   the   1870s,   and   the   emergence   of   mobile   telecommunication   networks   in   the   1980s.    Almost  a  century  separated  each  major  technological  improvement.    But  over  the  past  20  years,   rapid   innovation   has   revolutionised   the   way   we   communicate,   and   the   emergence   of  smart   phones   has   meant   that   network   operators   have   needed   to   find   ways   of   handling  increasing  volumes  of  data  as  well  as  providing  new  customer-­‐focused  services  to  develop  new  sources  of  revenue.      Founded  in  1876,  Swedish  telecom  equipment  maker  Ericsson  has  been  at  the  forefront  of  innovation   in   this   truly   global   industry:   from   inventing   Bluetooth   technology   to   bringing  mobile   Internet   to   the   heart   of   the   Amazon.     Ericsson   is   the   worlds   largest   mobile  telecommunications   equipment   vendor1   with   a   market   share   of   around   38%.2     According   to  the  company’s  2011  annual  report,  its  market  share  in  mobile  network  equipment  makes  it  twice   that   of   the   number   two   player.3       Ericsson’s   technology   underpins   much   of   the  hardware   that   makes   cell   phone   networks   actually   work4,   and   the   company’s   main  customers   are   network   operators.     Over   the   past   years,   Ericsson   has   realised   that   to                                                                                                                          1  2  February  2012  estimate:  3­‐directors-­‐report-­‐2011/competitive-­‐assets  4­‐to-­‐ericssons-­‐success-­‐forget-­‐the-­‐market-­‐leader-­‐focus-­‐on-­‐the-­‐neglectedunderserved-­‐market/     2  
  4. 4. maintain   its   competitive   edge,   it   cannot   only   offer   services   to   its   direct   customers,   the  network  operators.    It  started  looking  at  how  the  end-­‐users  of  the  services  it  manages  (users  of   mobile   phones)   use   their   phones   and   what   they   use   it   for.     In   2008,   Ericsson   launched   its  Collaborative   Idea   Management   programme   worldwide,   an   initiative   aimed   at   enabling   its  employees  to  innovate  every  day  across  the  organisation.5  The   company   created   the   concept   of   “The   Networked   Society”,   and   it   believes   that  technology   has   allowed   us   to   interact,   innovate,   and   share   knowledge   in   news   ways6   that  did   not   exist   only   a   few   years   ago.     As   we   enter   this   new   era,   an   increasing   number   of  devices   will   be   connected   through   typically   wireless   networks,   and   Ericsson   wants   to  continue  to  play  a  leading  role  in  connecting  those  devices  and  ultimately  people.    With  over  108,000   employees   around   the   world   and   serving   customers   in   180   countries7,   Ericsson  owns   the   largest   patent   portfolio   for   mobile   communications   for   2G,   3G   and   4G  technologies,  representing  around  30,000  patents.8    Moreover,  the  company  claims  to  own  25%   of   standard-­‐essential   patents   for   the   next-­‐generation   4G   (Long   Term   Evolution)  communication  which  allows  for  high-­‐speed  data  transfer  between  mobile  phones  and  data  terminals9   .   This   makes   Ericsson   the   largest   single   holder   of   essential   patents   for   the  technology10  which  is  seen  as  the  next  major  wireless  protocol  to  be  rolled  out  by  network  operators  around  the  world.    How  does  a  company  with  activities  in  180  countries,    and  that  operates   in   an   industry   dominated   by   rapid   technological   change   leverage   its   global  presence  to  remain  at  the  forefront  of  innovation?    What  drives  a  company  that  is  present                                                                                                                          5­‐innovates-­‐everyday-­‐collaborative-­‐idea-­‐management-­‐ericsson  6  7  8  9  10     3  
  5. 5. in   developed   markets   to   spend   time   bringing   internet   communication   to   difficult-­‐to-­‐reach  areas  in  the  Amazon  region,  and  why?    These  are  some  of  the  questions  that  fascinated  us  about   Ericsson,   and   that   we   tried   to   understand   while   researching   this   report.     More  surprisingly,   at   a   time   of   increasing   competition   and   rapid   technological   change,   R&D  expenses  as   a   percentage  of   sales  have  been  decreasing  at  Ericsson  over  the  past  3  years  as  the   company   gained   market   share   and   increased   its   revenue   despite   the   financial   crisis  affecting   the   industry   as   a   whole,   while   R&D   expenses   have   been   fairly   constant   and   at   a  higher  level  (as  a  percentage  of  sales)  at  its  closest  independent  competitor  Alcatel-­‐Lucent  (see  tables  1  and  2).      Ericsson  –  Financial  Highlights  (Source:  Annual  Report  2011)  SEK  in  millions   2011   2010   2009  Sales   226,921   203,348   206,477  Net  income  (N.I)   12,569   11,235   4,127  R&D  expenses   32,638   31,558   33,055  N.I  /  Sales   5.53%   5.52%   1.99%  R&D  /  Sales   14.3%   15.5%   16.0%   Table  1:  Summary  of  financial  data  for  Ericsson    Alcatel-­‐Lucent  –  Financial  Highlights  (Source:  Annual  Report  2011)  EUR  in  millions   2011   2010   2009  Sales   15,327   15,658   14,881  Net  income  (N.I)   1,144   (292)   (504)  R&D  expenses   2,472   2,593   2,465  N.I  /  Sales   7.46%   -­‐1.86%   -­‐3.38%  R&D  /  Sales   16.1%   16.6%   16.5%   Table  2:  Summary  of  financial  data  for  Alcatel-­‐Lucent     4  
  6. 6. Why   is   Ericsson   able   to   reduce   its   R&D   expenditure   while   still   innovating,   and   what   can  companies  in  different  industries  learn  from  Ericsson  and  the  way  it  uses  its  global  presence  to  innovate  and  roll  out  new  technologies  quickly  and  cost-­‐effectively?        Facilitating  innovation  by  leveraging  globality  –  a  three-­‐tiered  approach  Our  discussions  with  Ms.  Belitardo  and  our  analyses  of  multiple  case  studies  on  innovation  at  Ericsson,  suggested  that  there  are  three  areas  that  facilitate  innovation  at  Ericsson:   • Decentralised  decision  making  processes   • Organizational  Cultures,  and   • Cross-­‐regional  sub-­‐networks.    Decentralized  decision-­‐making  to  empower  staff  to  take  ownership  of  ideas  Ericsson   recognised   that   in   a   large,   global   organisation,   innovation   takes   different   aspects  (spanning   the   range   of   product   innovation   to   business   model   innovation),   and   that   if   the  company   is   to   promote   an   innovation   culture,   managing   the   generation   of   ideas   becomes   a  complex   task.     Hence   in   2008,   they   launched   a   company-­‐wide   collaborative   idea  management  programme  that  is  implemented  like  a  pull  based  internal  idea  marketplace  –  an   open   network   for   the   exchange   of   ideas   built   around   a   host   of   defined   innovation   needs  –  without  any  central  control  or  steering.11  Ericsson   is   organised   by   regions   (for   example   Latin   America,   North   America,   Africa,   etc..),  and   each   region   reports   to   the   HQ.     Each   region   has   responsibility   for   its   P&L   accounts,   and  the  company  has  deliberately  taken  steps  to  empower  its  regional  offices  by  decentralizing  decision-­‐making   process.     Rather   than   only   focusing   on   its   core   business   of   telecom                                                                                                                          11­‐innovates-­‐everyday-­‐collaborative-­‐idea-­‐management-­‐ericsson     5  
  7. 7. infrastructure   and   having   its   HQ   organise   and   dictate   R&D   efforts,   each   regional   office  targets  the  end-­‐users  in  the  local  market/community  by  understanding  their  market  needs  (for   example,   people   in   the   Amazon   region   needed   internet   access   to   communicate   with  remote   areas,   and   the   LatAm   regional   office   focused   on   understanding   which   services   were  needed   by   the   users   before   bringing   in   the   telecom   infrastructure   that   is   then   made  available  to  the  operators  that  are  Ericsson’s  direct  customers).    The  decentralized  decision-­‐making   gives   each   regional   office   a   high   level   of   discretion   on   how   to   focus   their   efforts,  thus   allowing   them   to   identify   local   needs   and   create   solutions   beyond   headquarters’  capabilities.         Thus,   as   figure   1   shows,   a   decentralised   decision   making   at   the   local   level  leads   to   new   innovations   within   a   region,   and   that   innovation   can   then   be   transferred   to  other  regions  across  the  world  as  and  when  required.    This  process  not  only  creates  value  for  the  local  region  and  all  its  stakeholders  (the  regional  office,  the  operator  that  benefits  from  a  new  source  of  income  and  the  end-­‐user  that  gains  access  to  new  services),  but  it  also  allows  Ericsson  as  a  company  to  capture  value  from  generating  revenue  from  products  and  services  that  are  relevant  to  a  specific  market.     Innovation         Decentralized  decision-­‐making     Figure  1:  How  decentralised  decision-­‐making  at  Ericsson  promotes  innovation     6  
  8. 8. Examples  of  this  decentralised  process  include:  (1)  The  Mobile  Weather  Alert  developed  for  the  community  in  Lake  Victoria  in  Uganda12,  a  mobile   application   that   improves   the   safety   of   fishermen   through   detailed,   customized  weather   forecasts.   Ericsson,   in   partnership   with   the   World   Meteorological   Organization   and  the  Uganda  Department  of  Meteorology,  have  developed  the  application  and  content,  while  the   National   Lake   Rescue   Institute   is   supporting   the   end-­‐user   and   usability   studies.   The  operational  model  (core)  has  been  designed  for  scale  and  replication.    (2)  The  Community  Power  project  from  Kenya13,  where  off-­‐grid  base  stations  are  placed  in  areas   without   electricity   grid   coverage,   powered   by   renewable   energy   sources   such   as   wind  and/or   solar   power,   with   the   ability   to   share   excess   power   to   the   nearby   communities,  institutions   and   individuals.   Depending   on   the   excess   energy,   the   base   stations   has   been  shown   to   be   able   to   power   mobile   phone   charging   (which   drives   network   usage),   and   in  larger   scale   deployments   (with   creation   of   mini-­‐grids   between   multiple   base   stations)  powering   street   lights,   clinics   and   schools   for   an   entire   community.   The   development  process  has  been  run  with  replication  in  mind.    (3)   In   Curibita,   Brazil’s   sustainable   city,   Ericsson   has   partnered   in   the   development   of   a   fleet  management  system  for  wireless  connected  buses,  resulting  in  increased  trust  in  public  for  safe   transportation   and   a   reduction   in   fuel   cost   and   travel   time14.   The   system   was   jointly  developed  with  DataProm,  Vivo  and  Telefonica,  and  has  recently  attracted  the  attention  of                                                                                                                          12  13    14       7  
  9. 9. various  cities  around  the  world  which  are  considering  launching  similar  services.    In  each  of  these   projects,   new   innovation   has   come   as   a   result   of   targeting   local   needs   and   creating  solutions,  which  can  then  be  expanded  globally  to  other  regions.    Organizational  Culture  for  utilizing  global  capabilities  A   decentralised   structure   needs   the   correct   communication   platform   for   the   exchange   of  ideas   to   actually   happen.     Ericsson   has   developed   an   organizational   culture   for   global  collaboration  and  knowledge  transfer,  which  manifests  itself  in  two  ways:  1. When  they  have  identified  a  market  need  that  needs  to  be  filled,  Ericsson  employees  are   encouraged  to  first  look  first  inside  the  company  (including  both  HQ  and  other  regions)   for   solutions   before   looking   outside   the   company   to   local   vendors.   The   HQ   can   help   facilitate  the  search  for  new  innovations  within  the  company,  but  employees  are  more   generally  encouraged  to  find  the  solution  by  themselves.    This  approach  seems  to  lead   to   a   proactive   workforce   which   encourages   collaboration   within   the   company,   across   different   regions.     Employees   see   it   naturally   to   look   across   the   globe   to   leverage   the   corporation’s   global   capabilities.   If   the   solution   exists   in   a   different   region/office,  a   price   will  be  negotiated  with  the  office  or  region  holding  the  patent/technology/product.    2. Ericsson   employees   therefore   continuously   have   to   look   outside   their   regions   when   developing   local   solutions.     Since   employees   know   that   there   might   be   a   global   demand   (from   other   regions)   for   a   novel   solution   they   are   developing   for   their   local   markets,   every  solutions  is  as  far  as  possible  made  replicable  (the  core  of  the  concept),  with  an   add-­‐on  layer  for  localisation  (“the  wrapper”),  as  shown  in  figure  2.     8  
  10. 10. Core:  StaYc   across  regions   Wrapper:   customized   across  regions     Figure  2:  Design  framework  for  innovative  products  at  Ericsson    Many  innovations  in  global  firms  are  not  transferrable  (i.e.  they  cannot  easily  be  replicated  in   a   different   region),   often   because   of   company   politics,   or   the   costs   required   to   re-­‐engineer  a  product  or  solution  to  meet  local  tastes  and  demands.  At  Ericsson,  these  issues  appear  to  be  addressed  by  having  an  open  structure  of  collaboration  that  is  entrepreneurial  in   that   few   of   the   discussions   are   centralised   (although   employees   know   that   the   HQ   is  available  to  help  if  help  is  required).    Local  regions  can  champion  their  ideas  to  other  regions  and   the   “buying-­‐in”   or   innovation   pull   mechanism   avoids   layers   of   bureaucracy   that   may   be  observed  in  firms  where  decision  making  is  more  centralised  through  HQ.      As  shown  in  figure  2,  the  innovating  group  can  sell  the  “core”  technology  of  the  product  to  the  adopter  group,  and  the  latter  can  develop  a  localized  “wrapper”  according  to  its  needs  and  specifications.  The  innovator  group  will  continue  to  innovate  within  this  framework  as  long   as   it   is   allowed   to   “sell”   the   products   to   other   parts   of   the   firm   because   it   not   only  generates  revenues  for  the  group;  it  also  streamlines  the  adoption  process,  decreasing  the  costs.     9  
  11. 11. With  a  new  tool  for  collaborative  idea  management  that  it  launched  globally  in  2008  under  the  name  IdeaBoxes15,  Ericsson  moved  away  from  pushing  innovation  efforts  to  its  regional  offices.     The   system   was   designed   and   implemented   as   a   pull   based   internal   idea  marketplace,  transparent  and  open  to  all  employees.    Adoption  within  the  firm  is  voluntary,  and  each  innovation  manager  has  the  choice  of  whether  to  utilize  the  tool  or  not.    As  the  system   is   open   to   all   employees,   ideation   goes   beyond   R&D   and   this   emphasises   how  Ericsson   recognises   that   its   employees   are   the   most   important   source   of   new   ideas,  regardless  of  their  job  description.  As  of  July  2011,  the  system  had  registered  over  15,000  ideas   while   supporting   Ericsson   in   the   effort   of   building   a   culture   of   collaboration   across  borders  and  units.    Cross-­‐regional  Sub-­‐networks  facilitates  information  sharing  One   of   the   biggest   challenges   for   global   firms   is   information   sharing   and   knowledge  management.  Innovation  often  comes  down  to  simply  connecting  already  existing  dots,  and  a   solution   to   your   problem   may   well   already   exist   in   another   region.   Solutions   developed  elsewhere   may   also   be   applied   differently   in   your   region,   and   hence   addressing   problems  that   it   was   not   intentionally   developed   to   solve.   However,   all   of   this   will   never   happen  unless   information   is   flowing   between   regions.   And   given   the   amount   of   information   and  innovation   in   a   corporation   the   size   of   Ericsson,   it   is   simply   not   possible   for   everyone   to  know  about  everything,  even  with  the  very  successful  implementation  of  IdeaBoxes.  So  how  can   we   assure   that   the   relevant   information   is   shared?   Ericsson   has   a   global   innovation  center  working  to  identify  and  globally  roll  out  selected  innovations.  However,  one  cannot  assure   that   the   innovation   center   is   qualified   to   decide   which   innovations   have   global  potential   and   which   do   not.   In   addition   to   this,   some   innovations   may   not   be   globally                                                                                                                          15­‐innovates-­‐everyday-­‐collaborative-­‐idea-­‐management-­‐ericsson     10  
  12. 12. applicable,   but   could   be   useful   in   one   or   two   other   countries.   One   of   the   measures   Ericsson  has   implemented   to   avoid   such   lost   opportunities   is   to   develop   sub-­‐networks   where   certain  departments  connect  globally  across  regions.  We  have  illustrated  this  by  the  example  of  the  sustainability   teams.   A   cross-­‐regional,   matrix-­‐like   network   exists   between   people   working  on  sustainability  projects  (see  figure  3).  Through  such  sub-­‐networks,  Ericsson  increases  the   Regional  knowledge   Cross  regional  sub-­‐network   Regional  knowledge   Regional  knowledge   Figure  3:  Cross-­‐regional  sub-­‐networks  based  on  function  likelihood  that  relevant  information  reaches  the  different  regions,  and  as  such  they  are  able  to   connect   more   of   the   available   “dots”   that   exist   within   their   company.   Specifically,   the  Community  Power  project  has  been  replicated  in  the  Amazon16,  and  is  currently  in  process  to  be  replicated  in  Surinam.  The  Bus  Fleet  Management  system  has  drawn  attention  from  several  other  regions,  and  is  likely  to  be  rolled  out  to  other  locations  in  the  near  future.  This  has   come   directly   as   a   result   of   communication   within   the   cross   regional   network   for  sustainability.   If   all   transfer   of   knowledge   and   innovation   was   to   be   channelled   through  headquarters,  it  is  likely  that  some  of  these  opportunities  would  not  have  been  recognized.                                                                                                                            16       11  
  13. 13. The  advantages  of  global  innovation  The   structure   at   Ericsson   not   only   encourages   innovation,   but   it   ensures   the   alignment   of  innovations   with   the   firm’s   strategy.   This   is   achieved   by   encouraging   internal   “trading”   of  innovative  products  and  solutions,  creating  a  fair  incentive  system  while  at  the  same  time  enabling  development  of  projects  that  otherwise  would  not  have  been  financially  viable.    On   a   firm   level,   this   structure   also   helps   in   the   reduction   of   training   and   support   costs   as  employees   don’t   have   to   be   educated   on   innovative   thought   process   and   sharing   new   ideas  and   technology   because   they   are   incentivized   to   do   so17.   Furthermore,   it   also   helps   in  optimizing   research   and   development   because   costs   are   shared   between   groups   that   adopt  an  innovative  product,  which  again  leads  to  incentivizing  innovation.  From  a  Global  Strategy  viewpoint,  we  believe  that,  Ericsson  leverages  its  global  position  to  “distribute”   innovation.   Ericsson’s   structure   empowers   regional   offices   to   gain   advantage  over  their  competitors,  by  adopting  and  localizing  innovation  from  other  regions  instead  of  reinventing   them.   Thus   Ericsson   first   focuses   on   the   benefits   that   it   can   bring   to   its   direct  customers   and   the   end-­‐users   of   its   services   (B↑).     This   customer-­‐centric   innovation  approach   increases   the   number   of   clients   (N↑)   who   can   see   how   Ericsson   wants   to   help  them   meet   their   goals,   i.e.   innovation   and   adoption   act   as   client   acquisition   tools   for  Ericsson.   The   costs   of   adoption   of   technologies   that   have   been   developed   within   the  company   in   a   different   region   are   usually   significantly   less   than   that   developing   a   similar  service   from   scratch,   and   this   causes   the   costs   to   go   down   (C↓).     Moreover,   there   is   already  expertise   in   the   new   product/service   within   the   company,   the   costs   of   training   staff   is  reduced   since   employees   can   learn   from   each   other                                                                                                                            17­‐innovates-­‐everyday-­‐collaborative-­‐idea-­‐management-­‐ericsson     12  
  14. 14. informally  when  they  source  the  technology.      Further,  when  a  group  adopts  a  product  from  a  different  region,  it  is  investing  in  a  product  that  has  already  been  tested  and  that  is  mostly  free   of   bugs,   which   decreases   the   risk   associated   with   launch   of   a   new   product   or   service  (σ↓).    Hence,  from  a  strategic  perspective,  the  innovation  structure  at  Ericsson  is  crucial  to  creating  and  capturing  value  for  the  firm.    Learning  from  Ericsson:  Rolling  out  its  approach  to  innovation  to  other  industries  Ericsson  is  able  to  leverage  innovation  globally  through  their  unique  organisational  structure  and   its   decentralised   approach   to   innovation.   The   combination   of   formal   and   informal  organizational   structure,   as   well   as   a   culture   for   innovation   and   collaboration   enables   the  firm  to  leverage  innovation  globally.  As  a  result,  Ericsson  increased  its  benefits  and  number  of  customers  and  decreased  costs  and  risk  associated  with  the  innovation.  Now,   having   seen   this   theory,   what   could   other   industries   learn   from   the   ‘Ericsson   style  innovation’  and  benefit  from  replicating  this  theory  within  their  firm?  We  believe  that  a  firm  in  a  fast  moving  industry  which  is  driven  by  customer  demand  could  benefit  from  replicating  the  ‘Ericsson  style  innovation’.    For  example,  in  the  innovation-­‐driven  high  technology  and  the  consumer  products  sector,  R&D  costs  are  typically  high,  and  there  are  transaction  costs  associated   with   rolling   out   technologies   fast   and   “localising”   them   to   specific   markets.    Ericsson’s  innovation  design  framework  that  consists  of  two  layers  (“core”  and  “wrapper”)  can   enable   such   industries   to   reduce   their   time   to   market   while   enhancing   collaboration  between  global  offices  which  need  to  buy  in  core  technologies,  by  copying  the  core  part  and  only  changing  the  wrapper  to  meet  local  needs.    Such  quick  roll-­‐out  of  new  products  may  be  critical  in  maintaining  and  developing  a  competitive  edge.     13  
  15. 15. Secondly,   this   approach   can   substantially   decrease   the   overall   R&D   cost   and   optimise   the  Sales/R&D  ratio.    Sustainability,  profitability  and  growth  are  3  components  that  are  essential  to  firm’s  success  and  innovation  is  an  important  element  for  firms  to  be  sustainable.  However  the  common  question  that  firms  face  is  how  to  remain  innovative?  The  ‘Ericsson  style  innovation’  gives  an  insight  to  this  question.  The  Ericsson  style  enables  the  firm  to  be  innovative  in  a  low  cost  and  low  risk  way  as  well  as  capturing  growth  in  new  markets  efficiently,  and  spreading  novel  solutions  through  a  culture  that  promotes  proactive  cross-­‐pollination  between  regions.         14