institut mines-télécom innovation and competition in global ict: telecom equipment marie...
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Institut Mines-Télécom
Innovation and Competition in Global ICT:
Telecom equipment
Marie Carpenter, Télécom Ecole de Management, France
Japan Conference on Financial Institutions for Innovation and Development
Co-sponsored by the Ford Foundation and Ritsumeikan University
Ritsumeikan University, Osaka Ibaraki CampusJuly 30-31, 2015
Introduction Phase 1 Phase 2 Phase 3 Conclusion
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The telecom equipment sector
National champions• ‘Fostered’ during roll-outs of national networks
Regular technological change • Hard to ‘predict’ winners
Cyclical nature of investments• New generations of technology require significant
capital investment followed by periods of low spending Increasing ‘globalisation’ of technological uptake
• Harder to spread risk across different markets as increasingly rolling out networks at same time (ex. 4G)
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Introduction Phase 1 Phase 2 Phase 3 Conclusion
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Telecom equipment – flashback to 1998
‘‘The Top 50 Telecommunications Equipment Companies in 1998’’• Concentration, Wireless, and Internet Protocol Drive
Largest Firms─ ‘‘The futures of the leading companies depend on their
ability to deliver new technologies at ‘Internet speed’. Strategic acquisitions are ever more essential’’
─ ‘‘With more than 8,000 IP developers at Cisco, and at least that many working at Nortel and Lucent (combined), the 1,000 or so at Alcatel, GEC [Marconi], and Siemens are insufficient to deliver on their ambitions.
─ Ericsson, Fujitsu, and NEC face a similar task but are further behind.’’ (p.100)
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Introduction Phase 1 Phase 2 Phase 3 Conclusion
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Top 15 telecom equipment suppliers in 1998
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7 from North America• Lucent• Motorola• Nortel Networks• Cisco Systems• 3Com• Hughes Electronics• Qualcomm
5 from Europe• Ericsson• Alcatel• Siemens• Nokia• GEC Marconi
2 from Asia• NEC• Fujitsu
Introduction Phase 1 Phase 2 Phase 3 Conclusion
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At first glance, European equipment manufacturers appear to have lost ground
Source: compiled by author from various databases with estimates for certain years for Fujitsu, NEC ZTE and Huawei.
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Introduction Phase 1 Phase 2 Phase 3 Conclusion
Percentage of revenues of top 20 firms ($m): 1995-2014
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Asian telecom equipment suppliers North American telecom equipment suppliers European telecom equipment suppliers
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However, equipment manufacturing and handset manufacturing have become distinct activities
6
Source: compiled by author from various databases with estimates for certain years for Fujitsu, NEC ZTE and Huawei.
Revenues of top 20 firms ($m): 1995-2014
Introduction Phase 1 Phase 2 Phase 3 Conclusion
0
50000
100000
150000
200000
250000
300000
350000
400000
450000
Total of all telecom equipment suppliers including handset manufacturers
Total of telecom equipment suppliers (without Apple, Samsung, LG Uplus)
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Without handset manufacturers, the situation appears less clearcut
7
Source: compiled by author from various databases with estimates for certain years for Fujitsu, NEC ZTE and Huawei.
Introduction Phase 1 Phase 2 Phase 3 Conclusion
Percentage of revenues of top 17 firms ($m): 1995-2014
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Asian telecom equipment suppliers (no Samsung, LG Uplus)North American telcom equipment suppliers (no Apple iPhone)European telecom equipment suppliers
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20 years of convergence towards an IP-dominated fixed & mobile telecom network
Phase 1• 1995-1999: boom times• Financialisation of North American telecom equipment
firms as they seek to emulate Cisco Phase 2
• 2000-2008: bust and recovery via mobile in emerging markets
• Disappearance of Lucent and Nortel (and Marconi)• Growth of pratice of stock buybacks in some firms
Phase 3• 2009-2014: stagnation in telcom equipment and growth in
mobile driven by iPhone & emerging markets• Motorola Mobility sold to Google in 2012 • Nokia’s terminal business sold to Microsoft in 2013
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Introduction Phase 1 Phase 2 Phase 3 Conclusion
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Phase 1: 1995-1999 Cisco’s ‘New Economic Business Model’ (NEBM)
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Cisco• world’s fastest growing company , dominated enterprise networking equipment
and moved into service provider market• Broad-based stock option compensation, innovation through ‘Aquisition &
Development’
Lucent : 100-year old ‘start-up’• Acquired Ascend for $24 billion (1999)
Nortel: ‘90-degree turn’,• Acquiring Bay Networks for $9.1 billion (1998)
Alcatel: ‘fabless’• Acquired Newbridge Networks for $7.1 billion (2000)
Marconi• Acquired Fore & RELTEC for $6 billion (1999) in cash!
NEC & Fujitsu (Kushida, 2011)
• ‘Galapagos effect’ of tough national competition and strong national standards
Introduction Phase 1 Phase 2 Phase 3 Conclusion
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Value of acquisitions $bn: 1997-2000
0
5000
10000
15000
20000
25000
30000
35000
1997 1998 1999 2000
Nortel
Lucent
Alcatel
Cisco
Source: adapted from Carpenter, M., Lazonick, W and O’Sullivan, M., ‘The stock market and innovative capability in the New Economy: the optical networking industry’, Industrial and Corporate Change, Vol. 12, N° 5, p.1006.
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‘Old economy’ companies need to supportstock price to ‘finance’ acquisitions
10
Introduction Phase 1 Phase 2 Phase 3 Conclusion
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March 2000: Cisco is the world’s most valuable company: $541 billion capitalisation
Market capitalisation index, 100 = January 1998
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Introduction Phase 1 Phase 2 Phase 3 Conclusion
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Unlike what was predicted and despite their lack of IP competencies, EU and Asian equipment suppliers are better positioned to survive the bust than Lucent and Nortel
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Phase 1: 1995-1999 Impact of the NEBM on NA firm performance
Introduction Phase 1 Phase 2 Phase 3 Conclusion
0
20000
40000
60000
80000
100000
120000
140000
1995 1996 1997 1998 1999 2000 2001 2002
European telecom equipment suppliersNorth American telecom equipment suppliers Asian telecom equipment suppliers
Source: compiled by author from various databases with estimates for certain years for Fujitsu, NEC ZTE and Huawei.
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Phase 1: 1995-1999 The impact of the NEBM on firm performance
When the bubble burst… Lucent and Nortel had destroyed themselves by trying to adopt the
stock-market oriented NEBM model • (Lazonick & March, 2011 and Lazonick & March, forthcoming)
European companies, Alcatel and Ericsson, resisted the adoption of the stock-market (financialized) dimensions of NEBM, and were much better positioned to navigate the collapse of the market in 2001 and 2002, but had to lay off tens of thousands.
Alcatel was able, in 2006, to take over Lucent Ericsson, focusing on wireless infrastructure, emerged as the leading
global competitor Siemens merged its telecom equipment division with Nokia’s in 2007
(and pulled out in 2013)
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Introduction Phase 1 Phase 2 Phase 3 Conclusion
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Phase 2: 2000-2007EU equipment suppliers benefit from mobile
Nokia and Ericsson benefit from roll-out of mobile networks in emerging economies
Developed markets suffer from over-investment in fixed network during the telecom boom of the late 1990s
Certain firms begin to use share repurchases
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Introduction Phase 1 Phase 2 Phase 3 Conclusion
Source: compiled by author from various databases with estimates for certain years for Fujitsu, NEC ZTE and Huawei.
0
20000
40000
60000
80000
100000
120000
140000
2000 2001 2002 2003 2004 2005 2006 2007
European telco suppliersNorth American teclo suppliersAsian telco suppliers
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Ironically, Cisco’s lack of success to date in penetrating the operator market shielded them from worst effects of fall-out from telecom ‘bust’:
- $2.2 billion inventory write-off, due to contracts signed with subcontractors- 2001: beginning of share buy-back ‘habit’
Stock price
1515
Phase 2: 2000-2007The telecom ‘bust’ and Cisco?
Introduction Phase 1 Phase 2 Phase 3 Conclusion
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Cisco: an obsession with stock buybacks since 2002= $6.85 billion/year on average (2002-2014)
Introduction Phase 1 Phase 2 Phase 3 Conclusion
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Who else was pursuing buybacks during this phase (2001-2008)?
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Stock repurchases $m: 2001-2008
Introduction Phase 1 Phase 2 Phase 3 Conclusion
0
1 000
2 000
3 000
4 000
5 000
6 000
2001 2002 2003 2004 2005 2006 2007 2008
Nokia Motorola RIM (Blackberry)
Source: annual reports
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Nokia
0
2000
4000
6000
8000
10000
12000
2001 2002 2003 2004 2005 2006 2007 2008
20-F SEC Filing 2004: ‘‘In 2004, we introduced
performance shares as the main element to our broad-based compensation programme..to further emphasize the performance element in employees’ long-term incentives’’ (20-F, p.100)
‘‘A smartphone is a new category of mobile device’’ (p.26)
A period of successful growth on the part of mobile device companies accompanied by massive stock repurchases
Introduction Phase 1 Phase 2 Phase 3 Conclusion
Source: annual reports
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Motorola
-5000-4000-3000-2000-1000
0100020003000400050006000
2001 2002 2003 2004 2005 2006 2007 2008
Motorola Press Release, July 24 2006
"Motorola remains committed to providing growth and value for our stockholders. We have completed our first-ever share repurchase program almost 2 years ahead of schedule and we are immediately instituting a second share repurchase program”, Press Release, July 24 2006
A period of successful growth on the part of mobile device companies accompanied by massive stock repurchases
Introduction Phase 1 Phase 2 Phase 3 Conclusion
Source: annual reports
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-8000
-6000
-4000
-2000
0
2000
4000
2007 2008 2009 2010 2011 2012 2013 2014
RIM (Blackberry) Toronto stock exchange forbade RIM from continuing to buy its own stock in May 2011 (Milstead, ‘‘RIM needs a software boost, not a share buyback’’, The Globe and Mail, May 2011)
A period of successful growth on the part of mobile device companies accompanied by massive stock repurchases
Introduction Phase 1 Phase 2 Phase 3 Conclusion
Source: annual reports
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Repurchases of stock followed by significant loss of revenues
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0
10 000
20 000
30 000
40 000
50 000
60 000
70 000
80 000 20
01
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Nokia
Motorola
BlackBerry
Introduction Phase 1 Phase 2 Phase 3 Conclusion
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0
20000
40000
60000
80000
100000
120000
140000
160000
180000
Performance of 'financialised' firmsPeformance of 'non-financialised' firms
Phase 3: 2009-2014Growth of telecom equipment firms who have been building innovative capabilities
2222
CiscoJuniper
MotorolaNokia
MarconiLucentNortel
EricssonAlcatelFujitsuNEC
HuaweiZTE
Source: compiled by author from various databases with estimates for certain years for
Fujitsu, NEC ZTE and Huawei.
Revenues ($m): 1995-2014
Introduction Phase 1 Phase 2 Phase 3 Conclusion
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• On Apr. 5, 2011, after “disappointing the market” for two quarters, Cisco CEO Chambers told employees: “we have lost the accountability that has been the hallmark of our ability to execute consistently for our customers and our shareholders.”
• From 2002 to 2014, Cisco expended $89 billion, 110% of net profits, on stock buybacks in an effort to boost its stock price.
• Its buybacks over the 12 years were 1.45 times its R&D expenditures.
• In Nov 2014, Cisco’s stock price was just 75% of its post-2001 peak (Nov. 6, 2007)
• & below that of its peer group
• 18,000 jobs eliminated between 2011 and 2014• “Restructuring” to optimise headcount
(Even) Cisco CEO’s mea culpa
Introduction Phase 1 Phase 2 Phase 3 Conclusion
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Despite $32 billion in buybacks (2009-2014)
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Introduction Phase 1 Phase 2 Phase 3 Conclusion
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5/12/2012
“Oops! Five CEOs Who Should Have Already Been Fired (Cisco, GE, WalMart, Sears, Microsoft)”
1.Steve Ballmer, Microsoft2.Edward Lampert, Sears Holdings3.Mike Duke, Walmart4.Jeffrey Immelt, General Electric5.John Chambers, Cisco Systems
“Mr. Chambers appears to have been great at operating Cisco as long as he was in a growth market. But since customers turned to cloud computing and greater use of mobile telephony networks Cisco has been unable to innovate, launch and grow new markets for cloud storage, services or applications. Mr. Chambers has reorganized the company 3 times – but it has been much like rearranging the deck chairs on the Titanic. Lots of confusion, but no improvement in results.”
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Cisco’s missed opportunity
Introduction Phase 1 Phase 2 Phase 3 Conclusion
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Source: compiled by author from various databases with estimates for certain years for Huawei.
Cisco’s missed opportunity: Huawei’s opportunity
Introduction Phase 1 Phase 2 Phase 3 Conclusion
0
10000
20000
30000
40000
50000
60000
Huawei revenuesCisco revenues
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Source: Infonetic’s Telecom Vendor Scorecard, August 2013
Huawei: n° 1 telecom equipment manufacturer in 2014
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Introduction Phase 1 Phase 2 Phase 3 Conclusion
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Cisco’s difficulties entering new segments:Example of the optical networking sector
Poor integration of acquisitions post-bubble
Pushing all-IP solution, not wanted by telcos
Reluctance to invest in plant and equipment:• testing of complex systems
• Upstream components
Unwilling to acquire ‘incumbent’ Nortel in 2009
Withdrawal of R&D resources from sector before return in 2012 with Coreoptics acquisition
Cisco and Huawei’soptical-related patent applications
(1993-2012)
Source: USPTO.
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Introduction Phase 1 Phase 2 Phase 3 Conclusion
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ON market share remains stagnant for Cisco but grows for Huawei (& ZTE, Infinera, Ciena)
Optical Transport Equipment Market Share (1998-2010)
Source: Dell’Oro
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Introduction Phase 1 Phase 2 Phase 3 Conclusion
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Existing businesses also at threat as internal R&D ‘in competition’ with spin-ins
Mario Mazzola, Prem Jain, and Luca Cafiero• Crescendo• Andiamo• Nueva• Insieme
$2.38 bn for their companies Jayshee Ullal, VP of Cisco’s
Data Center Tech Group left in 2011: “it's a nightmare when the guy in the next cubicle is a multimillionaire and you aren't, because you weren't chosen”
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Introduction Phase 1 Phase 2 Phase 3 Conclusion
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Technology leaders in telecom equipment, 2013
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Cisco appears in 3 out of 16 categoriesEricsson appears in 8Huawei appears in 10
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Introduction Phase 1 Phase 2 Phase 3 Conclusion
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2015-2025…who has the innovative capabilities needed for the converging landscape?
Huawei’s phenomenal (mostly organic) growth continues
Cisco struggles with its ‘‘growth through
acquisition’’ strategy
Introduction Phase 1 Phase 2 Phase 3 Conclusion
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Ericsson’s 10-year transformation, 2003-2013 from hardware to software
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Source: Steve Saunders ‘My Ericsson Epiphay’ Light Reading, April 2 2015 http://www.lightreading.com/data-center/cloud-strategies/my-ericsson-epiphany-/a/d-id/714836
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Introduction Phase 1 Phase 2 Phase 3 Conclusion
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0
50000
100000
150000
200000
250000
300000
350000
400000
450000
Asian telecom equipment suppliers
North American telecom equipment suppliers
European telecom equipment suppliers
Conclusions & further research
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Introduction Phase 1 Phase 2 Phase 3 Conclusion
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0
50000
100000
150000
200000
250000
300000
350000
400000
450000
Asian telecom equipment suppliers
North American telecom equipment suppliers
European telecom equipment suppliers
Conclusions & further research
35
Phase 1
New economy business m
odel
impacts NA firm
s who want to
support share price fo
r A&R
Phase 2 Phase 3
Introduction Phase 1 Phase 2 Phase 3 Conclusion
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0
50000
100000
150000
200000
250000
300000
350000
400000
450000
Asian telecom equipment suppliers
North American telecom equipment suppliers
European telecom equipment suppliers
Conclusions & further research
36
Phase 1 Phase 2
Mobile firms in
EU & NA adopt
repurchasing practices
Phase 3
Introduction Phase 1 Phase 2 Phase 3 Conclusion
New economy business m
odel
impacts NA firm
s who want to
support share price fo
r A&R
36
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0
50000
100000
150000
200000
250000
300000
350000
400000
450000
Asian telecom equipment suppliers
North American telecom equipment suppliers
European telecom equipment suppliers
Conclusions & further research
37
Phase 1 Phase 2
Mobile firms in
EU & NA adopt
repurchasing practices
Phase 3
‘Old economy’ firms f
rom NA,
Asia & Europe prosper
Introduction Phase 1 Phase 2 Phase 3 Conclusion
New economy business m
odel
impacts NA firm
s who want to
support share price fo
r A&R
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Why (and how) does this financialisation happen?
In Dec. 1999, the Spectrum report that questions what to do with the ‘‘unprecedented industry prosperity [that] is fueling a pile of more than $20 billion in liquid assets on the balance sheet of the leading equipment suppliers?’’• pay dividends but few of these companies do
• purchase of small companies but prefer to use stock
• buy back debt but most companies have avoided
• a cushion for bad times but ‘no sign of a downturn’ (!)
• ‘top up’ earnings but already robust
• buy back shares in a soft market but ‘little need’
• make more investments in equipment but not necessary
• invest in start ups but firm becomes a venture capitalist
‘’What is the purpose of keeping so much cash? No one is saying’’
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Introduction Phase 1 Phase 2 Phase 3 Conclusion
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Conclusions & further research
Buybacks limit resources available to acquire necessary architectural control & account control
Buybacks erode organizational integration of personnel into cumulative and collective learning process
On-going study of Cisco and its move into SDN & the cloud In-depth comparative studies of Huawei (Feng, Lazonick & Li), Ericsson
(Glimstedt) and Alcatel-Lucent (Carpenter)
39
Enter lower margin businesses to develop customer solutions (Huawei handsets)
Manufacture key components for differentiation
Propose solutions that solve customers’ problems even if heavy investment necessary
Build work-force skills in move from hardware to software
Reward employees equitably
Keep sufficient level of manufacturing of critical technologies in-house
Seek high-level competencies in product/service overlaps
Introduction Phase 1 Phase 2 Phase 3 Conclusion
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Conclusions & further research
Buybacks limit resources available to acquire necessary architectural control & account control
Buybacks erode organizational integration of personnel into cumulative and collective learning process
On-going study of Cisco and its move into SDN & the cloud In-depth comparative studies of Huawei (Feng, Lazonick & Li), Ericsson
(Glimstedt) and Alcatel-Lucent (Carpenter)
40
Enter lower margin businesses to develop customer solutions (Huawei handsets)
Manufacture key components for differentiation
Propose solutions that solve customers’ problems even if heavy investment necessary
Build work-force skills in move from hardware to software
Reward employees equitably
Keep sufficient level of manufacturing of critical technologies in-house
Seek high-level competencies in product/service overlaps
New economy business m
odel:
downsize & distr
ibute
Old economy business m
odel:
retain & reinvest
Introduction Phase 1 Phase 2 Phase 3 Conclusion
40