GROWTH CODES Extended strategies edition

May 2015

contents IDENTIFYING FRONTRUNNERS

3

BEHIND FRONTRUNNER EMERGENCE

10

A MINDSET FOR SUCCESS

5

LINKING STRATEGIES TO CODES

11

STRATEGIES TO PROFITABLE GROWTH

7

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 Create performance gap to competitors

Gap Minding

Measure and manage user experience

Showcasing

Market your performance leadership

GROWTH CODES Create strategic partnership for innovation

Co-Partnering

Embrace innovation

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Unboxing

Eco-Systematic

Create innovative offerings

IDENTIFYING FRONTRUNNERS Frontrunners were identified using three criteria: Frontrunner dynamics

> 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

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.

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 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 Peers achieved

180%

7.3%

Peer Frontrunner

160%

Frontrunners achieved

CAGR

12.4%

140%

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 Peer group achieved

140% The rest Peer Frontrunner 120%

Frontrunner group achieved

2.7% CAGR

9.6%

Rest of the market achieved

-1.4% CAGR

CAGR

100%

80% 2010

2011

Source: Ericsson analysis based on data from Strategy Analytics

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2012

2013

2014

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

3 STRATEGIES

CUSTOMER SCOPE PRODUCT SCOPE 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?

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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?

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 Customer scope > Address all major segments, consumers and enterprises > A consistent customer experience and focus on gap filling

CASE STUDY

Frontrunners in practice American operator

> Significant lead in data coverage > Showcasing extent of coverage visually against the competitors

36%

Revenue growth over 5 years

CUSTOMER

DATA MOBILE

BUSINESS

NETWORK

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

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

CASE STUDY

Frontrunners in practice Global operator

Market scope > Generally more selective distribution, for example, some channels, fewer resellers, more online > Often utilize sub-brands to target certain segments

> Fast follower > Tailored bundling for targeted segments – Targeted service for a vertical segment > Innovative billing > Reuse strategy in other markets

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

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.”

GROWTH

COO, Frontrunner Asia Pacific DATA

NETWORK CUSTOMER MOBILE

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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

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

13%

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

As it is a highly competitive market, we continuously create new offerings.” CSO, Frontrunner North America

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.

Figure 4: Frontrunner emergence through varying strategies

30 Offering-led transformation Market-led adaptation Quality-led progression

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. 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

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.

20

12

2013

2015

Figure 5: Market share distribution

30 Market share position 1 Market share position 2 Market share position 3

20

12

2013 Source: Ericsson analysis

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2014

Source: Ericsson analysis

Number of frontrunners

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.

2014

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

Streetwise Metrics

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

Showcasing

Co-Partnering

Unboxing

Eco-Systematic

Market-led adaptation

Streetwise Metrics

Gap Minding

Showcasing

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

Streetwise Metrics

Gap Minding

Showcasing

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.

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.

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