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 http://www.logostage.com/logo/ericsson/#.T9II0OIth-‐M (copyright by Ericsson)
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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.
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“…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 world's 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 http://en.wikipedia.org/wiki/Ericsson 2 February 2012 estimate: http://www.ericsson.com/news/1589097 3 http://www.ericsson.com/thecompany/investors/financial_reports/2011/annual11/results/board-‐directors-‐report-‐2011/competitive-‐assets 4 http://vivauniversity.wordpress.com/2011/10/24/key-‐to-‐ericssons-‐success-‐forget-‐the-‐market-‐leader-‐focus-‐on-‐the-‐neglectedunderserved-‐market/
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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 http://www.managementexchange.com/story/everyone-‐innovates-‐everyday-‐collaborative-‐idea-‐management-‐ericsson 6 http://www.ericsson.com/networkedsociety 7 http://www.ericsson.com/thecompany/company_facts 8 http://www.ericsson.com/thecompany/company_facts/patents 9 http://en.wikipedia.org/wiki/LTE_(telecommunication) 10 http://www.ericsson.com/thecompany/company_facts/patents
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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
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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 http://www.managementexchange.com/story/everyone-‐innovates-‐everyday-‐collaborative-‐idea-‐management-‐ericsson
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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.
Figure 1: How decentralised decision-‐making at Ericsson promotes innovation
Decentralized decision-‐making
Inno
vatio
n
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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
12http://www.ericsson.com/thecompany/sustainability_corporateresponsibility/technology_for_good/mobile_weather_alert 13http://www.ericsson.com/thecompany/sustainability_corporateresponsibility/technology_for_good/community_power 14http://www.ericsson.com/thecompany/sustainability_corporateresponsibility/technology_for_good/connected_busses_in_curitiba
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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.
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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.
Core: StaYc across regions
Wrapper: customized
across regions
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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 http://www.managementexchange.com/story/everyone-‐innovates-‐everyday-‐collaborative-‐idea-‐management-‐ericsson
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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
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.
16http://www.ericsson.com/thecompany/sustainability_corporateresponsibility/enabling_communication_for_all/connecting_the_amazon
Regional knowledge
Regional knowledge
Regional knowledge
Cross regiona
l sub
-‐network
Figure 3: Cross-‐regional sub-‐networks based on function
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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 http://www.managementexchange.com/story/everyone-‐innovates-‐everyday-‐collaborative-‐idea-‐management-‐ericsson
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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.
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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.
