REVIEW REINVENTING ERICSSON
Introduction
Ericsson is a Swedish multinational provider of communications technology services that offer communication
core, IP Network and transport, provider for 2G/3G/4G mobile network infrastructures. In 2001, Ericsson
launched 1 50/50 joint venture with Japanese electronics, Sony for marketing mobile phone.
Erricson experienced several challenges in run their business as business to business supplier provider. The
challenges cover the inefficiency of operational expenses, and less focused approach and standard in Research
and Development (R&D) and the dropping of 3G network prices due to fierce competition.
In this paper, we would like to explain and analyze the case that Erricson faced and what approach that can be
done to overcome their challenges.
Background
For the past years Ericsson had been largely overinvesting it can be seen where capex ware much higher than
operational growth. The dot-com-bubble was also bursting and financial markets worldwide became
cautious of any company linked with Internet, IT and telecom. The new reality hit Ericsson in early 2001 when
the order stock dropped.
Ericsson suffered inefficiency in operation expenses. It can be seen at 2001, Ericsson issued a first profit
warning and announced a cost cutting program of SEK 20 Billion Swedish Kronor. There are three programs
that all of them were aimed to increase the efficiency of operating expenses. First program, Ericsson applied
low hanging fruits by reducing external R&D, temporary worker, sold its stake in Juniper Networks, selling
off distribution operations. Second program, Ericsson cut all costs for all organizational level, the massive layoffs was also occurred in program. Third program, Ericsson decided to accelerate the saving program to
improve the operating margin by moving more production to low-cost countries, further cuts in IS/IT
operations as well as reductions of market units and local design centers. In third program, Erricson cut the
small customer, stop local customization and push global products.
Beside the handset business to Sony Ericsson, Erricson was a business to business supplier for large operators.
Ericssons share was still weak among the worlds top three operators (NTT, T-Mobile and Orange) but
remained strong among the rest of the. However, Ericsson was still market leader in mobile systems but the
competition was tight and sales declining in 2003. In the market, operators there so far preferred the less
expensive 2G systems and only a few had begun investing in 3G. Besides, the plethora of local Asian
competitors drove prices down. In addition, worldwide prices for 3G networks had dropped by about 20% due
to growing competition.
By its own account, Ericsson had one of the largest R&D programs in the industry, worth 20% of net sales.
Erricson has always allowed for wide research of technologies, it is quite difference with Nokia that only
invest in 3 or 4 technologies. In addition, R&D activities lead time seemed too long because 85% spending
time were not go to the innovation time, they went to testing, redoing and testing.
Analysis
Based on the explanation above can be seen that Erricson suffer inefficiency in operational expenses. Within
its operation expenses, R&D activity is the largest share of it. It affected to the high capital expenditures and
the lowering the revenue margin considering the R&D expenses contribute large share of cost of sales.
The programs to overcome the inefficiency of operation expenses by lay-offs and cost cutting for all
organizational level seems not good choice as long as the technologies invented by Ericsson were not market
oriented. Ericsson might allocate share of fund for R&D but the approach to inventing technologies should
consider the market needed and wants. So that the invention of technologies are really powerful in the market
in case of acquire new market and maintain their foot in the market. It also referred the products that are
categorized as unprofitable commodity such as radio station.
The concept of the product developed must propose consumer favor products offering the most quality
performance, or innovative features (Kotlet and Keller, 40, Marketing Management 14e, 2012). However,
company is sometimes caught in a love affair with their product. It is very important thing to ensure the
product developed or invented are correspond with the consumer favor.
Recommendation
The main issue in this case is the inefficiency of operational expenses. As explained above, R&D need to be
managed in order to ensure the technologies produced are accepted by the market. It is very important not only
to have technologies that are market oriented but also to perform effective and efficient R&D activities
particularly for operational expenses. It can be done by conduct market research deeply to understand what
actually market needs and wants for upcoming years considering the R&D require long time. There are many
ways to do this such as spreading survey, maintain net promoter score. This should be conducted in detail
cover all of segmentation variables. It is very critical action because Ericsson should aware and understand
what market they are being involved and new market that can be created or entered by the invention of new
technologies.
The business lines that are unprofitable also need to be revaluated to ensure the operational activities are
supporting to increase their sales in market and the share of operating expenses in cost of sales can be
minimized. If the business lines seem not give great contribution to the revenue and have not great value for
the market Ericsson might dispose them by sell them or create another company focusing to manage the
business. At the same time Ericsson need to strengthen the business line that has great chance in the market
such mobile systems. The allocation of the resources should be reorganize in order the resources are effectively
used correspond with the weight or value of the business line that Ericsson has. In other word, rationalize its
products line and organizations need to be done if the products line do not give great value to the company.
The most important thing is Ericsson should find the right product for its customers not the right customers for
it products (Kotlet and Keller, 40, Marketing Management 14e, 2012).
Conclusion
The structure of the marketing, sales and R&D functions was the key issues. All of them should coordinate to
ensure that R&D creates the right product, and sales functions can sell them to the market. In here, marketing
has very important roles to give knowledge to the R&D functions about the market and the characteristics of
the products that need to be developed and give knowledge to the Sales function about the keys to approach the
market. In other words, the business functions of Erricson work with precise planning to generate effective and
efficient work performance.
Bibliography
Narayandas, Das, Vincent Marrie Desain, Daniela Beyersdorfer, and Anders Sjoman. Reinventing Erricsons.
Harvard Business Shool Case 9-507-075, June 2007.
Kotler, Philips and Keller, Kevin. 2012, Marketing Management 14e. Pearson.
