On 2 July we had an interesting case study discussion on Ericsson and the creation of the mobile telephone systems business written by Prof. Patrick Regnér Stockholm School of Economics. A spirited group of students,
Christina, Rahil, Chintan, Deval, Manasa from our strategy class made an impressive presentation. The technical aspects were simplified and strategic issues analyzed in depth.
A global supplier of public telecommunications systems was founded in 1876 in Stockholm Sweden as a telegraph equipment repair shop by Lars Magnus Ericsson. It was incorporated on August 18, 1918 and entered automatic switching and continued to concentrate on telephone exchange and switch design. The R&D investments resulted in a digital switching system AXE which was well respected and contracts all over the world were signed. The relationship built with a PTT (Post, Tele and Telegraph) – monopoly Govt. organizations became a long-term contract relationship with little competition.
A small and lesser known autonomous subsidiary of Ericsson was SRA (Svenska Radio
aktiebolaget). Who had to overcome deep rooted cultural barriers of its gigantic parent Ericsson to turn it into the world’s largest supplier of mobile telephone systems? SRA’s from the beginning had been in radio products for the military market as well as civilian use.
Ivar Ahlgren, who was president of SRA from 1961 to 1977, had established a decentralized organization free from bureaucracy that gave employees considerable freedom. He was succeeded as president by Åke Lundqvist, who was previously manager for the land mobile radio division. Lundqvist saw the potential of radio communications like few others. A pioneering spirit emerged, and SRA became a center for experimentations.
SRA’s culture and character was different due to its small size, microscopic role and unrelated market and technology. However its President Åke Lundqvist’s quest “We had a vision to eliminate the wire in telephony, everybody laughed at us” indicated his bold strategic intent.
The Nordic Mobile Telephone Network (NMT)
The Swedish and other Nordic PTTs were pivotal in developing and establishing mobile telephony in Sweden and the Nordic countries. Telecom equipment manufacturers – Ericsson
& SRA and their competitors NEC, Motorola, Fujitsu, were asked in 1997 to submit proposals to provide NMT network. However Ericsson offered its AXE at the insistence of the Swedish PTT more in order to preserve old relations with its long-term partner.
Ericsson was not enthusiastic about mobile systems as it believed mobile telecom was directed toward professional use exclusively. Even Bell & AT&T, which originally invented mobile telecom networks market research, concluded the potential to be insignificant. Yet SRA believed in their own vision and had greater enthusiasm for the NMT venture despite not having its own base stations (central part of mobile systems).
When mobile telephony began to gain momentum in the company, employees learned quickly. Equally important was Åke Lundqvist’s strategy in the late 1970s and 1980s, when he acquired a number of companies, such as Sonab, Nira, Magnetic and Radio system that were important for SRA’s development.
The First Cellular Mobile System in the World
The first mobile telecom system in the world was delivered in 1981 not to the Nordic countries but to Saudi Arabia. NMT to the Nordic countries became operational a couple of months later.
A large order for AXE-switches from Saudi Arabia in 1978 eventually led to the first test of SRA’s strategy of expansion Åke Lundqvist got the idea to try and sell a mobile system to the Saudi PTT around 1978-79. Ericsson’s joint venture with Philips was working out fine and the cooperation with the Saudi PTT was very successful.
Åke Lundqvist took his idea to Björn Lundvall, at the time Chairman of the board of Ericsson. Lundvall liked what he heard and in turn presented the idea to the Saudi Minister when he arrived in Stockholm for a project meeting. SRA did not have any hardware ready, but did have a concept. In those days equipment was sold based on concepts.
Saudi Arabia wanted to buy a mobile telephone system. In the beginning Ericsson and Philips was supposed to share the order, but after long negotiations Ericsson delivered a system based entirely on the NMT-standard. The first mobile telecom system in the world was delivered in 1981 to Saudi Arabia. The mobile system in Nordic countries also became operational a few months later.
The first cellular systems were not without problems. The Saudi order of 8000 mobile stations put pressure on production sources – there were no terminals left to sell in the Nordic home market. Competitors exploited the situation. There were quality problems too and as SRA’s marketing manager said “It was a mess”. SRA sailed through the mess with confidence.
PTTs start showing interest in Mobile Telephony Systems in 1980s
SRA started to penetrate more markets. In 1982 SRA accounted for only 5% of Ericsson sales yet in 1983 Åke Lundqvist predicted audaciously that ‘by the turn of the century sales in Ericsson’s mobile telephone business would pass that in public telecom’.
When telecom monopolies began to be broken up during the 1980s, state-owned PTTs were not the only companies that were interested in mobile systems. Young and enthusiastic entrepreneurs who knew nothing about technology were also keen in this field. These new customers required a new kind of marketing strategy that was lacking in much of the rest of Ericsson but was found in SRA.
US entry – 1982
Åke on the advice of a US-based consultant decided to enter the US. Despite meager marketing resources and facing tough competition SRA remained undeterred and won contracts in several US cities. They took great risks and subscribed to stocks of subscribers/operator companies to gain contracts. Since operators are ever in a cash crunch owing to the long
gestation period of the telecom business. This was done against competition action of providing loans to operators. However in the end lot of money was almost lost. Refer to ‘Private Treaties’ run by media companies at http://www.timesprivatetreaties.com/
Ericsson’s competitor GE owned Marconi therefore the former bought Marconi’s interest in SRA in 1982. However they kept their focus on EIS and SRA became a wholly owned company – Ericsson Radio System (Inc) ERA one of seven business areas with a focus on Radio.
Ake Linddqvist moved himself and his team to Southern Sweden on a field in Kista into new buildings, which gave him the time and space to get the business going without interference from corporate executives. They had to struggle to gain acceptance of Ericsson during development and would have been killed by the bureaucratic parent if Ake had not been persistent.
UK entry and new International markets – Europe
ERA strapped for resources with the US venture boldly seized an opportunity in the UK that
came up at the same time and decided to take them both. This involved expansion from a small sales organization to a large manufacturing & R&D company in the UK. ERA won the contract in competition with AT&T and Motorola.
Lars Ramqvist becomes Ericsson President 1988
ERA succeeded in their long-term internal battle and the mobile telephony business gained 40% share of the global market. Åke Lundqvist considered ‘too wild and unstructured’ by corporate management resigned at the peak of ERA’s success. Lars Ramqvist, who succeeded Åke Lundqvist as president of ERA became part of the mobile division’s culture. Two years later, Lars Ramqvist became the first Ericsson president to be recruited from the radio side. He took the entrepreneurial spirit and the new marketing philosophy with him from Kista to Telefonplan (HQ of Ericsson).
The case mentions by 2001 after year after year of success, Ericsson experienced major difficulties. The group’s handset business was in crisis and the infrastructure arm is being battered by global economic slowdown. The critical comments point at Ericsson phones being well engineered indeed over-engineered – while failing on basics such as design, usability and battery-life. Their engineers focused on engineering and disregarded the ‘looks’.
Some critiques hold Ramqvist (1990 to 1998) responsible for Ericsson’s inability to make tough decisions, such as failing to exit its doomed handset business, which cost the company $2.4 billion in one year. In 2001 the stock dropped 75% from the previous year’s high. In particular, its handset business has been outstripped by competitors such as Nokia, and Ericsson has not acted fast enough.
Estimates indicate Ericsson has accounted for 15% of Swedish economic growth in recent years. Sweden is almost hysterical about Ericsson – “If Ericsson slows down Sweden slows down”.
The case depicts the relationship of Ericsson with SRA as tenuous and reveals how organizational culture plays a central role in companies that are adapting to a constantly changing environment.
The parent company was much larger and used to operating in a stable environment provided
by the PTTs with little competition. It became unresponsive to fast changes in the global environment. SRA on the other hand was an entity that was entrepreneurial and unpredictable.
The strategic approach was different Ericsson – rational deductive and inside-out and SRA – maverick, experimental and outside-in. SRA was more in tune with changing trends and opportunities in the environment. The larger organization is more structured and bureaucratic and tends to curb the entrepreneurial spirit of the smaller entity. Ericsson’s culture comes out as one that is averse to change.
Åke Lundqvist’s unconventional leadership style and bold strategic intent is a perfect example of how an entrepreneurs mind should work. The case however does not speak much on the strengths of Ericsson and its leadership. Despite the inertia typical in large organizations it did allow SRA/ERA to break out and pursue their own vision.
1. After an uphill battle within Ericsson and the outside competition Åke Lundqvist made Ericsson a world leader in the Mobile Telephony market. Why did he resign at the peak of glory?
2. Was it the difference of perspectives and visions of the parent Ericsson with the smaller autonomous SRA (ERA) that contributed to Ericsson’s success in the world market?