Exploring Strategy

by Johnson, Whittington & Scholes 1 PTT refers to Post, Telephone and Telegraph, which were the traditional government organisations or monopolies respon- sible for running a country’s postal and telecommunications services. 2 A base station is equipped with transmitters and receivers and covers a geographical area or a ‘cell’ with radio signals connecting to mobile telephones. Base stations are connected to mobile telephone switches, which in turn are linked to the fixed telephony network. This case was prepared by Patrick Regnér, Associate Professor, Institute of International Business, Stockholm. It is intended as a basis of class discussion and not as an illustration of good or bad practice. © Patrick Regnér, 2007. Not to be reproduced or quoted without permission. Case Study Ericsson and the creation of the mobile telephony business Patrick Regnér The case describes the history of the Swedish telecommunications company Ericsson’s entry into the mobile telephony market. It examines the characteristics of strategic change from a public telecommunication to a mobile telephony focus, and shows how strategic innovation may emerge from the periphery of an organisation. The case describes how a small and insignificant unit in Ericsson turned the company into becoming the world’s largest supplier of mobile telephone systems. The focus is therefore on the dynamics of strategy innovation from the beginning of the 1980s to the turn of the century. Ericsson delivered the first commercial mobile telephone system in the world to Saudi Arabia in 1981. The company sold the system despite Saudi Tel, Saudi Arabia’s PTT (Post, Telephone and Telegraph), 1 not specifying it at all in its order of telecommunication networks and equipment. Furthermore, Ericsson did not actually have a mobile phone system to sell or the required products for its infrastructure. This was, however, the first step towards making Ericsson the largest mobile telephony company in the world. SRA – an autonomous and self-reliant company with a vision It was a small and autonomous subsidiary of Ericsson, SRA, that insisted on selling a mobile tele- phone system to Saudi Arabia. SRA led a rather languishing life as a radio communication supplier at the time and, basically, was an independent company. The company’s focus had been on radio products for the military as well as civilian use (radio receivers, gramophones, TVs, radio systems for aviation and shipping, radar installations, etc.). Since the 1960s the company had consolidated into communication and military radio equipment, leaving consumer goods. Its major business was in the military market. SRA’s independence from Ericsson not only was due to its small size, unrelated technology and generally microscopic role in Ericsson, but reflected the fact that British GE-Marconi owned 29 per cent of the company at the time. The President of SRA, Åke Lundqvist, was extremely enthusiastic about mobile telephony. He had joined SRA in the mid-1960s and had been in charge of the land–mobile radio division since 1970. He had been involved in mobile radio and mobile telephony since the end of the 1950s, when he worked for another company. He participated in the development of one of the early Swedish mobile telephone systems, MTB (which could only handle six telephone calls simultaneously in Stockholm). SRA also had a history in the system since it supplied the base stations and telephones. 2 Lundqvist had an early vision of the importance of mobile telephony, a vision ‘based on radio technology, to eliminate the wire from the regular telephony’. However, at Ericsson SRA’s vision was derided, and the company was considered a ‘garage outfit’, a ‘bicycle repair shop’ represented by ‘cowboys’. As one manager in Ericsson’s largest division, the public telecommunications division, put it: ‘They were not really a part of us. They looked different and behaved differently.’ Ericsson – a public telecommunications company with AXE as the flagship product The main products of Ericsson had traditionally been switching and transmission equipment. A switch, or telephone exchange, controls and operates telephone calls in a telephone network. In the early days it consisted of a manual system where an operator used pairs of plugs to connect people on a switchboard. All major R&D was invested in switching and Ericsson introduced its digital switching technology, AXE, at an early stage. It became widely known and well respected and contracts all over the world had been signed by 1980. The PTTs had historically been the principal markets for these products. Roughly a dozen telecommunications companies dominated the world market (AT&T, Ericsson, CIT-Alcatel, Fujitsu, Hitachi, ITT, NEC, OKI, Plessey, Siemens, Strowger). They competed for orders from the PTTs where markets were open. The USA was still closed and the British PTT bought only from British companies. Similar arrangements prevailed in many other markets. Political considerations often played a larger role than commercial or technological ones. Once a relationship had been built with a PTT, it usually lasted for a long time with continuous follow-up contracts and competition was limited. As John Meurling, Director of Corporate Relations and Investor Relations at Ericsson, described at the time: The vendor-customer relationship could often be described as marriage-like: once a PTT had made its system choice – or often vendor choice, which might go back to the beginning of the century – the relationship was expected to continue for a long time. ...Not many countries were supplied by one manufacturer only, but very few countries had more than two or three. For most companies it was cosy. 3 Even if Ericsson had one of the least ‘cosy’ positions, because the Swedish PTT manufactured most of its own switches, the culture and way of doing business reflected the prevalent stable and semi-competitive environment. However, SRA, although quite remote in terms of both technology and products, had spent its whole 60-year history in a less protected and quite competitive business environment. Most managers at Ericsson did not know much about SRA; it was a minor, independent and pretty unglamorous business. AXE was the flagship of Ericsson and public telecommunications was its captain. As John Meurling described it: We [Public Telecom] were the biggest, the most important, and the most beautiful part of the Ericsson Group – and we knew it. 3 The Nordic mobile telephone network The Swedish and other Nordic PTTs were pivotal in developing and establishing mobile telephony in Sweden and the Nordic countries. They joined forces in order to develop the Nordic mobile telephone (NMT) network. Telecommunication equipment manufacturers were asked in 1977 to submit proposals to provide the NMT network. Ericsson and SRA and their competitors – among them NEC, Motorola, Mitsubishi and Fujitsu – were invited to bid. Ericsson, however, was not particularly enthusiastic about mobile phone systems. Its public telecommunications unit was not interested in providing switches for mobile systems. Ericsson finally offered switches, but it was more in order to preserve old relations with its long-term partner, the Swedish PTT, than enthusi- astically to enter a new market. Ericsson did not offer its latest technology (AXE) at first. An adjusted AXE switch for mobile telecommunication was simply seen to have a limited future. The company, however, subsequently did offer AXE at the insistence of the Swedish PTT, which indicated that otherwise it might adopt the technology of NEC, the closest contestant. Ericsson’s lack of enthusiasm for mobile phone systems reflected its very small role com- pared with its other businesses and a belief that mobile telephony would continue to be of minor importance. Mobile telephony was seen as something more exclusive and directed towards pro- fessional use. Personal application was something not very serious – a service for the privileged. 2 Exploring Strategy Classic Case Studies 3 J. Meurling, and R. Jeans, ‘A switch in time: AXE – creating the foundation for the information age’, Communications Week International , 1995.