The value grid approach allows firms to identify opportunities and threats in a more explicit way than the traditional value chain. This research aims to test the Value Grid in a multinational company: Ericsson Mobile Platforms (EMP). How does the value grid model help to define the organization’s Key Success Factors (KSF)? For this case study, the value grid concept proved to be an interesting heuristic tool to locate opportunities that are not evident from a traditional value chain perspective. EMP can identify indirect ways of influencing demand by playing a coordinative role with network operators.
Key Success Factors for Ericsson Mobile Platforms using Porter’s Value Chain model
The value chain model, first depicted and popularized by Michael Porter in 1985, has proved to be an effective approach to analyze and capture the value generated along a chain of activities. But, with the increasing complexity of production and service delivery, critique has arisen from both academics and professionals in terms of value chain model applicability. The value grid approach allows firms to move beyond their industry lines and to identify opportunities and threats in a more explicit way. This research aims to test the Value Grid in a multinational company: Ericsson Mobile Platforms (EMP). How does the value grid model help to find novel opportunities and define the organization’s Key Success Factors (KSF)? For this case study, the value grid concept proved to be an interesting heuristic tool to locate opportunities that are not evident from a traditional value chain perspective. EMP can identify indirect ways of influencing demand by playing a coordinative role with network operators.
1. Models of Value
The purpose of this part is to analyze the evolution of value models from the value chain to the value grid through the value system, the value network and the added value chain. The intent is to clarify the relevance of the value grid choice for studying the case of Ericson Mobile Platform.
The Value chain
The value chain includes all the activities involved in product making. It is a useful tool to measure the value created for each activity in the process of product creation. It is a part of a firm’s strategic planning to arrange these activities in a way that the total value, the value that buyers are willing to pay, exceeds the total cost. According to Porter (1985), a company can create value through a cost advantage or product differentiation.
Porter (1985) identifies two types of activities in the value chain: Primary activities and Support activities. Primary activities are those that create customer value. The goal of the primary activities is to produce value that exceeds the cost, thereby resulting in a profit margin. Support activities concern procurement, human resource management, technological development and infrastructure such as accounting, legal, finance, planning, public affairs, government relations, quality assurance and general management. The activities in the value chain are not independent. Linkages may exist between activities. In fact, one process may affect the cost and performance of the others. Linkage can exist between primary activities, as well as, between primary and support activities. Therefore, competitive advantages can also be derived from the linkages between activities. This is a highly relevant situation for EMP.
The Value System
Porter (1985) extends the concept of the value chain; a firm’s value chain is a part of the Value System, which is a network of interconnected value chains between suppliers and buyers. The value system includes the value chains of the upstream suppliers and downstream channels and customers. The available total margin is spread across suppliers, distributors and customers (Recklies, 2001) in the value system. The amount of how much part of this margin is received by each member depends on its market position and negotiation power (Recklies, 2001). A firm who has higher degree of vertical integration has a better position in coordinating its upstream and downstream activities and therefore get a higher margin, however a company with low level of vertical integration can also get high margins if it can achieve better coordination with suppliers and partners.
The Value Network
Porter (1980, 1985) measures value chain and the five forces model extracted from the organization’s activities, in terms of financial value (margin) but ignore the fact that intangible assets such as competencies, internal structures and relationship with the environment are the driving factors behind the financial results (Sveiby, 1997). New methods appear to take into consideration the intangible assets. Value Network Analysis (Allee, 2003) is a “method that combines tools that analyze strategy with insight into complexity of interactions among people” (Middendorp, 2005). According to this analysis, the intangible assets should be considered as negotiable and exchangeable.
Peppar and Rylander (2006) introduce the Network Value Analysis (NVA) method as “a way to analyze competitive ecosystems”. Combinations of players co-create the value in the network and the method focus not only on the company or the industry, but the value creating system itself (Peppar and Rylander, 2006). Firms cultivate an ecosystem “a set of firms that can co-create value” by building relationships among the different players in the industry: suppliers, partners, allies and customers (Peppar and Rylander, 2006). Firms that understand the sources of value in the network and are able to exploit them will be the winners in tomorrow’s more complex industries (Peppar and Rylander, 2006).
The Added-value Chain
According to McPhee and Wheeler (2006), focusing on the firm’s internal core activities is not sufficient to generate value in today’s firms. The authors propose an added-value chain model that includes a set of expanded business activities from different business models and a redefinition of value that incorporates brand, reputation, and relationship-based value drivers of the firm. In the added-value chain model, the definition of value incorporates profit margin and intangible assets like leadership quality, innovate capability, brand equity and competences in strategic-alliance development. This new value definition gives to the firms the ability to evaluate how their strategies affect both “hard” and “soft” assets of the firms (McPhee and Wheeler, 2006). This model is incomplete for example in finding and exploring non-linear value opportunities.
The Value Grid
New research conducted by Pil and Holweg (2006) argues that this approach “can also put a stranglehold on innovation at a time when the greatest opportunities for value creation (and the most significant threats to long-term survival) often originate outside the traditional, linear view”. Based on this critic, Pil and Holweg (2006) develop an evolved concept of Value Chain called Value Grid, which has a variety of new paths to enhanced performance, resulting in a three dimensional grid: the vertical, the horizontal and the integrative diagonal dimensions.
Regarding the vertical dimension, firms are seeking for competitive advantages in the value chain by reducing cost, reducing lead time between activities and improving coordination between supplier and customers. However, how the benefits are distributed across the value chain depends on the balanced power between suppliers and manufactures. Therefore companies need to focus on three areas: Opportunities to influence customer demand both upstream and downstream, opportunities to modify information access in either direction, and finally opportunities to explore penetration points in multiple tiers that are not immediately adjacent (Pil and Holweg, 2006).
The horizontal dimension provides opportunities for companies to move across value chains, in order to leverage economies of scale across multiple sources of demand (Pil and Holweg, 2006). The potential of this dimension is to enable companies to manage risk, seize existing value (special products with advanced technology), integrate sources of existing value and explore new ways to create value. The horizontal thinking allows parallel value chains to be viewed from different industries, in this way companies can integrate these parallel value chains to offer package or price combinations, which cannot be achieved by the single value chain approach.
Finally, in the diagonal dimension, firms explore the grid in an integrative fashion, in order to increase the control over inputs and customers. Firms looks at the upstream and downstream of other value chains for controlling the critical components of the supply chain and uncovering new ways of boosting customer demands (Pil and Holweg, 2006). Pil and Holweg describe the two strategies that take advantages from this dimension: The first is pursuing Pinch-Point mapping when companies shall monitor key component supplies and negotiate alternative source of components. The second is defining demand enablers when companies that have a particular expertise in a given value chain, can examine other value chains in other industries that can leads to new opportunities to leverage key competitive advantages (Pil and Holweg, 2006).
The telecommunications industry is undergoing radical transformations through liberalization, lowering of technological barriers to entry and the diversity of players (Li and Whalley, 2002). Originally, the process of manufacturing a complete mobile phone was finished within one company. However, as with the PC industry, the value chain for making a mobile phone has become more fragmented according to a more stratified approach (Anderson and Jönsson, 2006). Companies like Ericsson Mobile Platforms (EMP) and Qualcomm are examples of this change in the industry. They provide technology solutions for mobile manufactures that enable them to make a new phone model much faster without having the core knowledge like radio access.
New actors and new services enlarge the mobile communications value chain in both ways, functionally and institutionally (Buellingen and Woerter , 2004; Ballon, de Munck, Poel and de Pas, 2001; Fertig, Prince and Walrod,1999).
The traditional concept of value chain may not be sufficient for today’s firms (Buellingen and Woerter, 2004). Barnes (2002) tries to adapt the value chain analysis for m-commerce and analyses the players, technologies and activities involved. Full-size image (36K)
The basic model consists of six core processes in two main areas: First infrastructure and services, and second the area of content.
Pagani and Fine (2008) consider five principal actors in the supply chain: the content providers, application providers, infrastructure providers, network providers the device providers. They assume that the end consumers create demand, set the rules of engagement and then pull the supply chain system (Pagani and Fine, 2008).
In the last decade with the entry of powerful new players, rapid technological developments and increasing market turbulences (Li and Whalley, 2002), the mobile handset industry has changed from a vertical specialization to a more horizontally stratified structure. A complex and rapidly evolving value network is developing (Li and Whalley, 2002). There are more parties involved in the process of making a mobile phone. Each party focuses on areas of the value chain where they have core competences such as new technology, customer relationships management, or infrastructure management. The market is then highly complex and competitive given the fact that companies compete also with companies from other industries operating under different value propositions and economics (Li and Whalley, 2002).
Methodology: Research design and data collection
There are several techniques for identifying Key Success Factors, Leidecker and Bruno (1984) propose the following: environmental scanning, industry structure analysis, industrial expert’s opinions, competitor’s analysis, best practice analysis, assessment of the company’s internal feeling or judgment, intuitive factors and gathered data of profit impact and market strategy. This study mixes between internal assessment of a firm and industrial expert’s opinions. This internal assessment technique explores the firm’s forces and weaknesses. The KSFs are thus concluded from the interviews with experts in the industry.
Figure 1 about here
As designed in the research model, first a value chain analysis focuses on the firm’s core competences from an inside perspective. In parallel, the firm’s value chain is positioned into the value system of the industry, to identify adjacent players and external linkages and determine firm’s ecosystem. An analysis of the Value Chain aims to identify competitive advantages. From the Value System and the ecosystem, the Value Grid framework identifies competitive advantages from its three dimensions. The outcomes from Value chain and Value Grid are analyzed to test the Value Grid and to extract the KSF for EMP.
An ideal analysis of the KSF for EMP would be to do benchmarking with other companies from the same Industry. Then it will be possible to define EMP’s real strategic advantages. However, due to availability of information this research focuses on an inside-out perspective and tests the concept of the Value Grid using one source of empirical data (a single case study).
Semi-structured interviews are conducted with a specific list of topics to be covered (Bryman and Bell, 2003). The advantage of this method is that the interviewer is free to reformulate the questions or simply ask new questions that may appear as a result of the answer of the interviewee (Bryman and Bell, 2003). According to Grunert and Ellegaard (1992), this type of interview with business decision makers can measure perceived KSF.
Five key persons are chosen for an interview from EMP: Robert Puskaric, head of EMP, Martin Jönsson, from Product Portfolio Management, Fredrik Dalhgren Deputy Director of System Management, Pär Stigmer from Sourcing and Supply and Linda Wenerman from Product Management.
Empirical Findings for Ericsson Mobile Platforms
Ericsson Mobile Platforms is a business unit within the Ericsson Group. It was founded in 2001 as a result of a split from the Ericsson mobile handset division, Ericsson Mobile Communications. This split ended up in Ericsson Mobile Platforms (EMP) and the joint-venture Sony Ericsson Mobile Communications. Before that time, Ericsson produced mobile platforms for in-house use only. Through EMP, Ericsson started to license open-standard 2.5G and 3G technology platforms to other mobile phone manufacturers and other mobile communication devices.
EMP offers stable platform deliveries that include ASICs and development boards (hardware), platform software, reference design, development and testing tools, training, support and documentation. The EMP platforms contain integrated circuits and softwares needed to build a GPRS, EDGE and/or WCDMA phone. It provides all the system functions such as Network Signaling, Data communications and Multimedia services. The system architecture of EMP is a modular design that is built on a use case analysis (Kornby, 2005). Examples of use cases are: imagining, video telephony, voice call, multimedia streaming, call handling, audio and video.
The following criteria have been taken into account to develop this system architecture (Kornby, 2005): complete platform software (not only protocols), stability, flexibility, scalability to different market segments, adaptability to customer software applications, one single architecture for different mobile systems (GPRS, EDGE, WCDMA), maximum reuse of components and customer applications; and backward compatibility in software over the time.
Customers build their applications on top of EMP platform software stack. Examples of customers applications are: multimedia players, phone call applications, web browsers, etc. EMP also supplies a suite of core applications where customers can use as a starting point for building their applications. EMP provides a complete application suite to support customers who do not build their own applications. This is especially for customers who want to focus in the low-end market. The goal of the EMP’s Application Suite is to reduce time-to-market for customers in launching their phones.
EMP’s business model
The EMP’s business model consists of two parts: to license its core technology and to sell engineering support services to the customers. EMP charges a one-time up-front fixed payment for a Platform license and a royalty per unit that represent the major source of revenue (Kornby, 2005). EMP has built an ecosystem in order to ensure the maximum value creation for EMP. The five players in the EMP’s ecosystem are depicted in figure 2.
Figure 2 about here
The first set of players relates to Network Providers; these companies offer the telecom infrastructure such as wireless communications systems. The main partner with EMP is LM Ericsson’s network group. They work hand-by-hand to provide end-to-end solutions, align roadmaps and ensure that EMP platforms can support the new network functionality offered by Ericsson (Kornby, 2005). Second, EMP has a closer relationship with the customers to ensure that new customer requirements are collected promptly in order to implement new functionality as early as possible.
The third set of players in EMP ecosystem relates to Network Operators. These companies provide the services to the end-users (subscribers). They also purchase phones from mobile manufactures that are sold to the operators’ subscribers. Very often operators request mobile manufactures to use a specific mobile platform (Kornby, 2005). Thus EMP has built an important relationship in order to understand future operators’ requirements to secure that new functionality is available in the EMP’s platform.
Fourth, EMP and LM Ericsson are active at work with the standardization bodies such as 3GPP, OMA, JCP and OMPT. This is done in order to ensure interoperability of EMP’s mobile platforms worldwide. And finally EMP works actively with ASIC, peripheral, IP and software suppliers in order to get fair prices for building EMP products.
4.2 The EMP’s Value Chain and Value System
The direct activities of EMP’s value chain are: supply chain Management, hardware design activity, Software development and integration activity, a system reference design activity, a System Test and Interoperability Test (IOT), Product Use, External Networks and finally a customization activity. EMP has also a prototype unit that builds prototype phones for testing early functionality. The EMP’s value chain and value system are depicted in figure 3.
Figure 3 about here
4.2.1 Supply Chain Management
EMP basically does not have any regular material flow, but outsource software and hardware through licenses. The task of the sourcing and supply department is to act as an internal consultant at EMP for deciding whether to buy an IP or develop hardware/software in-house. The sourcing department works tightly with the product definition and the R&D organization; they work proactively to ensure fair prices. The decisions are based on three aspects: comparing the prices of buying from others and developing by itself, assessing the risk of buying and finally evaluating the total value by an in-house development. For example, to get a new IP in the platform, the sourcing department evaluates the total cost composed of the getting IP cost from supplier and the using IP cost (license) per ASIC. In this case customers pay the license directly, the cost of integrating an IP into the suppliers’ ASIC (a supplier may have already the knowledge of adding this IP, thus it becomes cheaper) and the cost of the final integration into the platform (how difficult is to make drivers and APIs to control the IP).
The sourcing and supply department acts differently depending of what wants to outsource. For IPs, the negotiations are based on case, for ARM and DSP cores it builds long term relationship with the suppliers, and for a specific component such as Image Signal Processor (ISP) it chooses the best price in the market. Since ASICs are costly, EMP co-develops the design with suppliers and builds long term relationship.
4.2.2 Hardware design (HW)
Regarding the Hardware, EMP only designs and specifies requirements for the different hardware components in the platform. As is shown in the Error: Reference source not foundASIC suppliers (or fabs) test and manufacture the hardware. EMP verifies the hardware components only when it builds the reference design. The design of the HW is divided into two main parts, Front-End and Back End design. For the Radio Frequency (RF) hardware EMP designs the Front-End and Back-End. For the Digital Base Band (DBB) EMP only does the front-end design. Finally, the analog base band (ABB) ASIC, EMP only specifies the hardware requirements and leaves the rest to the ASICs suppliers
4.2.3 Software development and Integration
Software development and Integration refers to developing software solutions for the different stacks in the software platform architecture. This activity also involves developing EMP (in-house) software stacks such as Network Signaling protocols for WCDMA, GSM/GPRS and EDGE; data communication protocols such as, TCP/IP, RTP, and IMS; multimedia protocols for streaming music and video; developing a set of application platform interfaces to control the software platform and hardware. DBB, ABB, RF, and peripheral are to implement low level drivers to control hardware components inside the mobile platform. This activity also involves integration of third party proprietary software components such as, music codecs (like MP3 and Windows media player), and operating systems. This activity also involves testing the software at different levels: module tests, regression tests and integration tests.
4.2.4 Reference design
EMP builds reference boards and real-size reference phones. These non-commercial phones are produced in small quantities that are internally used for software development and hardware verification, interoperability test and early-stage test of hardware for customers.
4.2.5 System Test and Interoperability test
The system test consists of the verification of the complete reference design. The tests are conducted in lab, with network vendors and interoperability test with major live networks operators in the world. This is a very costly task and it is done to uncover ambiguities in the basic standards and specification. It also covers informal type approval test for the phone (Kornby, 2005).
Value Chain Analysis
According to the theoretical framework a company can generate competitive advantages by analyzing the different activities in the value chain. EMP’s value chain basically works only in the service domain. EMP licenses its platform solutions and let the customers manage the manufacturing process with EMP’s suppliers, thus the EMP’s core activities are design (both in hardware and software), integration and testing of the platform (of the whole system). EMP’s advantage appears in the fact that the firm has designed a holistic system architecture which makes easy to develop and test the functionality independently. This saves considerable a considerable time amount at the integration phase. Moreover, the system is designed to be flexible and scalable, so it is easy to re-use and add new functionality. Therefore, EMP’s main strength is that the firm successfully manages to develop, integrate and test very complex new technologies to deliver a stable cost-effective platform solution when technology development is not in a mature phase. The main EMP’s competitive advantage is to be the leader in providing cost-effective solutions for the mass market when the new technologies are emerging. Another interesting strength found is that the brand image of Ericsson plays an important role when meeting with new suppliers. The reputation of the Ericsson corporation is transferred to EMP and it facilitates the starting of new agreements and business opportunities.
The value chain is an analytical tool that helps to find value in each activity; this can also be used for finding weakness and improvement areas. From the value chain we can identify two main weaknesses. First, the base band ASICs are the most costly part in the platform, despite that EMP says that it has managed to get fair licenses prices for the ASICs. The power of the suppliers is relatively high, thus EMP cannot have full control of the hardware prices. It seems that high margins still go to ASIC manufactures. Second, at this moment, EMP does not have the competence and the resources to integrate vertically in the upstream value chain.
According to the interviewees, the most valuable strategic resource at EMP resides in personnel’s competence in the area of radio access technology and in the skills for designing a flexible and low cost system. These two competences are the driving forces for providing a cost-optimized mobile platform. The main risk in the value chain comes from the supplier’s side. When technology reached a mature market, there is a risk that the technology becomes a commodity product and thus, suppliers can acquire knowledge on how to implement these technologies in their own ASICs. This implies that ASIC manufactures can produce ultra low cost platforms, due to the fact that they can control the price of the hardware.
Another identified potential risk relate to how much EMP should outsource (Varadarajan, 2009). As is shown in the value chain (figure 3), EMP outsources a number of software components. An indiscriminate software outsourcing policy may lead to the loss of competences inside the EMP value chain (such as signal processing knowledge) thus reduce the value of the platform offering.
What are the EMP’s keys factors that are considered important for success? EMP is constantly evaluating and comparing with competitors in terms of cost, size, performance and power consumption of the product offering. From an end-user’s perspective, EMP is interested in delivering high quality multimedia functions for providing good speech and audio quality. Other benchmark measures are purely financial measures. All the interviewees agree that there are areas of improvement for EMP from a value chain perspective.
5.2.1 Horizontal integration
In most of the interviews, a potential improvement for EMP consists in the integration of the value chain from a horizontal perspective by adding others technologies for example to offer an integrated solution with WLAN, BT or FM radio. The platform today provides the flexibility to add these peripherals, but this is a work that the customer must do when he done the product design (and it doesn’t add a real value for EMP). This extended platform function offering in EMP platforms has the following impacts: 1) As customers will have less control over the price for these peripherals, they will not be able to bargain the prices 2) the cost of the EMP platform for customers will increase, 3) the total PCB area will go down due to integration of the peripheral in the ASICs and 4) the final product from a customer perspective (i.e. phone ready to launch with everything in place) will result in a total cost reduction. Thus, EMP would add value into the platform and customers will benefit from cheaper phones. In order to integrate these peripherals, EMP should create alliances with these suppliers in a cost effective manner (Håkansson and Ford, 2002). It is not enough to just integrate any peripheral; it should be a peripheral that can be used by almost all customers in the different platforms, in a way that provide a common platform offering. Otherwise it will end up in a customized platform and the total value added from a portfolio perspective may not be that clear. An example of a peripheral that may fit with this approach is BT devices. The goal of EMP will probably be the re-use of the same platform as much as possible; however this is not defined yet.
EMP has managed to have more than one ASIC supplier. This has increased the possibilities of getting fair prices. EMP is still looking to increase the number of suppliers to gain bargaining power.
5.2.2 Vertical integration
Almost all the interviews discuss the fact, if the vertically integration must be in the upstream or not. As was described, the most costly part in the platforms is the ASICs and in order to offer competitive price, alliances must be created with ASICs suppliers. However, what if EMP chooses a fabless model? EMP would need then to focus more on the design of the hardware devices (today, it leaves it to some suppliers to design the hardware). EMP should start to do more IP designs, to focus on the back-end design of all the hardware components (ASICs) and create cell libraries for them. This vertical integration implies that EMP would leave ASIC manufacturing to a silicon foundry (for example, companies like TSMC, UMC, Chartered, etc). The advantage is that EMP would be able to choose suppliers, to get better prices and thus to get higher margins. For instance the EMP’s competitor Qualcomm has this approach and uses TSMC as ASIC manufacturing.
Nevertheless, complete back-end design requires EMP to build specific competence and skills for the complete hardware design. Moreover, EMP would need to take care of production issues like yield management, quality and logistics. This could lead to an expensive learning experience. Since EMP is a rather small company in global terms which focuses mostly in software design and system integration, a solution would probably be to invest in a company who has already the skills and experience. But in the near future this option will be not considered.
Test of Value Grid
Value Grid offers a variety of new paths to enhance performance, resulting in a three dimensional grid: the vertical, the horizontal and the integrative diagonal dimensions (Pil and Holweg, 2006).
6.1 Vertical Dimension
From the theory of Value Grid and the analysis of the value chain in the previous section, there is a match between the External Networks from the value-added chain concept and how to influence customer demand in the downstream. In this case the relationship between EMP and network operators plays an important coordinative role (Andersen and Christensen, 2005). EMP cannot influence demand directly since this activity is mainly driven by EMP’s customers who manufacture, distribute and sell the phones to operators and end-users by other distribution channels. Indeed, network operators distribute a great part of the mobiles phones to the end-users due to their infrastructure. In order to increase traffic in their networks, they finance partly the cost of the phone by tying it with contracts (fixed subscriptions periods normally for one or two years) or offering a phone at lower cost with the restriction that the phone can only be used exclusively with prepaid SIM cards. Therefore, to increase sales and market share, EMP can build a strong relationship with operators and persuade them to buy mobiles phones from EMP’s customers.
6.2 Horizontal Dimension
In this dimension similarities were detected betwee
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