GROWTH CODES Extended strategies edition May 2015
contents IDENTIFYING FRONTRUNNERS 3 A MINDSET FOR SUCCESS 5 STRATEGIES TO PROFITABLE GROWTH 7 BEHIND FRONTRUNNER EMERGENCE 10 LINKING STRATEGIES TO CODES 11 Introduction There has been a widely held view in the market that operators are struggling to generate growth as they move into a smartphone and data-centric world. However, some operators around the world are proving this to be false. They are prospering thanks to large amounts of data and the usage of new services not in spite of them. We have identified what makes a frontrunner: operators with superior service revenue growth and a high share of non-voice revenues. We have found the common components and significant differences in their strategies for profitable and sustainable growth. Our key finding was that there are six common traits that are shared by frontrunners we call these Growth Codes. The Growth Codes Rather than specify a single recipe for success, Growth Codes represent a consistent approach taken by frontrunners to generate profitable revenue growth in their own markets. DRIVE USAGE MONETIZE USAGE Streetwise Metrics Measure and manage user experience Create performance gap to competitors Gap Minding Showcasing Market your performance leadership GROWTH CODES Create strategic partnership for innovation Co-Partnering Unboxing Create innovative offerings Embrace innovation Eco-Systematic 2 ERICSSON GROWTH CODES REPORT MAY 2015
IDENTIFYING FRONTRUNNERS Frontrunners were identified using three criteria: > Achieving a healthy annual revenue growth signified by 5 percent or higher > Maturity in respect to capturing business through a higher proportion of non-voice revenue, beyond 25 percent > Remaining profitable through positive EBITDA These operators have market-leading revenue growth and leverage on their strong performance in non-voice revenue segments. We also looked at how these frontrunners were able to maintain stability and sometimes grow their voice revenue. From just 12 frontrunners in 2013, to around 20 in 2014, it is forecast that by the end of 2015 there will be 30. This study sheds light on how the six different codes are used in conjunction with strategies deployed in unique market conditions. Frontrunner dynamics The criteria used to identify frontrunners is formulated based on the entire results of a given year. Dependent on the maturity of the market and the dynamics of growth, some frontrunners that previously satisfied the criteria might drop out. The frontrunners that drop out due to not entirely fulfilling the criteria do not contribute to the total number of frontrunners in the drop-out year. That being said, an operator that stops being a frontrunner may still exhibit the traits of Growth Codes, in light of unique market growth activity and relative performance. Frontrunner performance These operators have succeeded through a combined focus on technology and a go-to-market strategy across the six Growth Codes, monetizing on the increased data and services usage. As Figure 1 shows, these operators were able to achieve an average 12.4 percent CAGR in revenue 2010 2014, compared to their peers on the same market at 7.3 percent. These frontrunner operators have not only been able to drive top-line revenue, they have done so profitably. Figure 1: Average CAGR of included operators 180% 160% 140% Peer Frontrunner Frontrunners achieved 12.4% CAGR Peers achieved 7.3% CAGR 120% 100% 80% Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Source: Ericsson analysis based on data from Strategy Analytics ERICSSON GROWTH CODES REPORT MAY 2015 3
An increasing share of reported revenue comes from data. These frontrunners each have quite different starting points; they may be leaders or challengers in their own markets, or active in markets with different levels of maturity. Interestingly, it was noted that the presence of a frontrunner in a market could be a passive driver for their peers to achieve a stronger performance. When looking at the entire industry, through the summation of revenues (Figure 2), we note that frontrunners CAGR is at 9.6 percent, their peers are at 2.7 percent and the rest of the market is at -1.4 percent. Figure 2: CAGR of total revenue per group 140% 120% The rest Peer Frontrunner Frontrunner group achieved 9.6% CAGR Peer group achieved 2.7% CAGR Rest of the market achieved -1.4% CAGR 100% 80% 2010 2011 2012 2013 2014 Source: Ericsson analysis based on data from Strategy Analytics 4 ERICSSON GROWTH CODES REPORT MAY 2015
A MINDSET FOR SUCCESS Quality of service is the foundation of growth Independent of the market role that a frontrunner takes, we have found a clear pattern in growth strategies; there is huge emphasis on the quality of service as the foundation of growth. Network performance also has a prominent position in the growth strategy of all frontrunners and remains a constant focus. We have found that frontrunners leverage this in two different ways. Some frontrunners use network performance as a differentiator. They constantly strive for superior performance compared with their competitors. Others emphasize the importance of network performance in order to meet customer expectations. They typically have not had a leading position in the market and have realized the need to avoid a head-on collision in direct competition. Rather they diversify their focus into both the understanding of users and incorporating that into their Quality of Service. They are usually motivated by a competitor with superior network performance driving the average customer expectation higher. You need to have a credible network, it s a must have. CSO, Frontrunner North America The frontrunner approach to growth Frontrunners are characterized by a mindset that challenges conventions to make connectivity more available to people, businesses and society. They seek new ways of doing business, leading the transformation of their customers lifestyles. In order to achieve this, frontrunners deploy growth strategies with a dual focus, enhancing their core business while at the same time exploring new markets and capabilities to secure future revenues. In this report, we are focusing on the strategies for current growth, in order to understand what has made this particular group of operators so successful. Frontrunners seek new ways of doing business, leading the transformation of their customers lifestyles ERICSSON GROWTH CODES REPORT MAY 2015 5
Figure 3: Investigating the three strategies DIFFERENTIATION MARKET SCOPE CUSTOMER SCOPE PRODUCT SCOPE 3 STRATEGIES TECHNOLOGY AND OPERATIONS Through investigating frontrunners differentiation, market, customers and product scope, as well as their approaches to technology and operations, we identified three different strategies that frontrunners adopt: Quality-led progression Market-led adaptation Offering-led transformation Each of the three strategies has five components, as displayed in Figure 3. These five categories are made up of the following: Differentiation What s the main differentiation in the way they conduct their business, how do they see themselves in respect to the market, and how does the user see them? Market scope How do they market their offerings to the user and what channels/tactics do they utilize? Customer scope What customer elements do they focus on and how do they deliver on these? Product scope What products do they offer and how does their portfolio variety play into their strategy? Technology and operations What kind of partnerships do they utilize and how do they become more than a simple connectivity and communications platform provider? Is there a focus on internal efficiency? 6 ERICSSON GROWTH CODES REPORT MAY 2015
STRATEGIES TO PROFITABLE GROWTH The framework used to structure this study is from the Colin Campbell-Hunt, Strategic Management journal titled What have we learned from generic competitive strategies?. This framework is based on 17 generic competitive strategies covering more than 6,000 firms, in which strategy classifications are reflected back to the ones that correlate with financial return and growth. The study s research included analyzing financial statements and interviews with frontrunners C-Suites, across a variety of countries. The result was the identification of the three different strategies adopted by frontrunners: > Quality-led progression > Market-led adaptation > Offering-led transformation QUALITY-LED PROGRESSION Frontrunners that take a quality-led progression strategy differentiate themselves due to their high-performing networks and services, as well as strong brand preference. Differentiation > Invest in a high-performing network and high brand preference > Focus on core products and services > Project the brand image of a high-performing network to consumers using simple messaging > Diversify the business growth strategy Market scope > High brand preference through sales and service quality > Aim to be close to a broad customer base through distribution channels CASE STUDY Frontrunners in practice American operator > Significant lead in data coverage > Showcasing extent of coverage visually against the competitors 36% CUSTOMER Revenue growth over 5 years DATA Customer scope > Address all major segments, consumers and enterprises > A consistent customer experience and focus on gap filling Product scope > Rarely first to market, and rely on an extensive high-quality service portfolio, converged offerings and customized solutions > Few strategic partnerships Technology and operations > Fully-fledged variety of support platforms and processes > Relatively low focus on efficiency NETWORK MOBILE BUSINESS ERICSSON GROWTH CODES REPORT MAY 2015 7
MARKET-LED ADAPTATION Frontrunners that adopt a market-led adaptation strategy are differentiated thanks to their quick adaptation to market conditions. Differentiation > Quick adaption to market conditions Market scope > Generally more selective distribution, for example, some channels, fewer resellers, more online > Often utilize sub-brands to target certain segments Customer scope > Focus on providing a superior end-to-end experience for the selected target segments through being close to the user and understanding their needs CASE STUDY Frontrunners in practice Global operator > Fast follower > Tailored bundling for targeted segments Targeted service for a vertical segment > Innovative billing > Reuse strategy in other markets 28% Year-on-year subscriber growth in targeted segment Product scope > Fast followers of new products and services > Medium-sized portfolio with some degree of customized solutions > Some strategic partnerships Technology and operations > Medium focus on operational efficiency > Agile business support systems and processes in key areas We think from a customer point of view, putting the customers at the center of everything we do. COO, Frontrunner Asia Pacific GROWTH DATA NETWORK CUSTOMER MOBILE 8 ERICSSON GROWTH CODES REPORT MAY 2015
OFFERING-LED TRANSFORMATION An offering-led transformation strategy sets frontrunners apart from rivals with its uniquely designed offerings that redefine customer value. Differentiation > Uniquely designed offerings and first to market Market scope > Sales and marketing efforts rely on their unique offering > Often relying on growth from certain segments > High focus on market innovation Customer scope > Continuously renewing offerings to promote customer interest and loyalty > Focus on customer satisfaction and brand Product scope > Many strategic partnerships with attractive, leading companies Technology and operations > High focus on operational efficiency > State-of-the art business support systems and related processes CASE STUDY Frontrunners in practice Asian operator > Open-ended innovation > Improved brand sentiment and NPS through strategic partnering and improved network performance > Attractive plans targeting pre-paid users As it is a highly competitive market, we continuously create new offerings. CSO, Frontrunner North America 13% Year-on-year growth in total revenue NETWORK MOBILE CUSTOMER DATA LTE ERICSSON GROWTH CODES REPORT MAY 2015 9
BEHIND FRONTRUNNER EMERGENCE Crowning an operator as a frontrunner does not come with any requirements in terms of size or position in the market. The diverse elements of the three strategies show that there is a fine balance between the focus on the superior technological network performance and knowing exactly what the customer wants. This balance is achieved through a combination of methods, ensuring that an operator s strategy fits the technology evolution strategy and aligns with consumer readiness, willingness to pay and the go-to-market dynamics. Between 2012 and 2015, we have seen a diverse set of strategies deployed by each frontrunner. In 2012, the majority were leveraging their size and assets to deliver superior quality and thereby achieve profitable growth. With time, we have seen that operators applying other types of strategies are also emerging as frontrunners, indicating that profitable growth can be achieved through different strategic directions. Figure 4: Frontrunner emergence through varying strategies 30 Offering-led transformation Market-led adaptation Quality-led progression 20 Number of frontrunners 12 As the markets evolved, other strategies started shining and gaining more momentum. It is likely that these strategies were applied by the challengers to capture some market share, without a head-on collision that would create a price war. Figure 4 highlights each strategy adopted by frontrunners between 2013 and 2015. As time progresses, it has become clear that all three strategies can garner success. 2013 2014 Source: Ericsson analysis Figure 5: Market share distribution 2015 30 Size doesn t matter By observing frontrunners over the same timeframe and focusing on their market position, we see that they are found in both market leader and challenger positions. In fact, in 2013 the majority of frontrunners were positioned third in their respective markets. We have found no direct correlation between being a frontrunner and the size of an operator s subscriber base. The frontrunners in the study have between a few million and hundreds of millions of subscribers. This indicates that profitable growth can be achieved regardless of market size or position, and that smaller markets with fewer subscribers pose no hindrance to becoming a frontrunner. Number of frontrunners Market share position 1 Market share position 2 Market share position 3 20 12 2013 2014 2015 Source: Ericsson analysis 10 ERICSSON GROWTH CODES REPORT MAY 2015
LINKING STRATEGIES TO CODES The use of Growth Codes varies for each strategy. Frontrunners will place higher importance on some codes, but will also complement them with others. Quality-led progression Differentiate on high-performing network and brand preference A network performance gap is created between competitors in the market through the Gap Minding code. This is coupled with the ability to showcase this gap in a simple and understandable manner. There also needs to be a focus on creating innovative offerings that capture customer value effectively, which is known as Unboxing. Frontrunners using this strategy will partner with organizations that share a similar innovative mindset, which refers to Co-Partnering. Gap Minding Co-Partnering Streetwise Metrics Showcasing Unboxing Eco-Systematic Gap Minding Streetwise Metrics Showcasing Market-led adaptation Differentiate on quick adaptation to market conditions Frontrunners look to understand, measure and manage user experience through Streetwise Metrics. This strategy quickly adapts to market conditions and the need for targeted segments, so frontrunners showcase their user experience to a select set of segments. These frontrunners mirror other successful offerings from competitors, but add value by capturing more customer needs. Co-Partnering Unboxing Eco-Systematic Offering-led transformation Differentiate on being first to market with uniquely designed offerings This approach understands the need for Gap Minding in terms of network performance, and operators target the segments that their innovative offerings are directly impacting. Their Unboxing considerations are very strong, they are Eco-Systematic and do not regard OTT players as threats, but instead generally leverage their offerings. Gap Minding Streetwise Metrics Showcasing Co-Partnering Unboxing Eco-Systematic ERICSSON GROWTH CODES REPORT MAY 2015 11
Ericsson is the driving force behind the Networked Society a world leader in communications technology and services. Our long-term relationships with every major telecom operator in the world allow people, business and society to fulfill their potential and create a more sustainable future. Our services, software and infrastructure especially in mobility, broadband and the cloud are enabling the telecom industry and other sectors to do better business, increase efficiency, improve the user experience and capture new opportunities. With approximately 115,000 professionals and customers in 180 countries, we combine global scale with technology and services leadership. We support networks that connect more than 2.5 billion subscribers. Forty percent of the world s mobile traffic is carried over Ericsson networks. And our investments in research and development ensure that our solutions and our customers stay in front. Founded in 1876, Ericsson has its headquarters in Stockholm, Sweden. Net sales in 2014 were SEK 228.0 billion (USD 33.1 billion). Ericsson is listed on NASDAQ OMX stock exchange in Stockholm and the NASDAQ in New York. The content of this document is subject to revision without notice due to continued progress in methodology, design and manufacturing. Ericsson shall have no liability for any error or damage of any kind resulting from the use of this document. Ericsson SE-126 25 Stockholm, Sweden Telephone +46 10 719 00 00 www.ericsson.com EAB 15:025630 Uen Ericsson AB 2015