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  • Reduced innovation contributes to Ericsson’s sales decline

    10/28/2016

    The giant Swedish telecom company Ericsson has been all over the news in the last few weeks due to the gloomy financial reports indicating a continuation of its decade long falling revenues, and the recent firing of its CEO as well as this week’s announcement of a new CEO assigned with the task of reversing this trend.

    These recent events and numerous news articles discussing Ericsson’s economic crises seem to only tackle the issue of economic growth (or in this case economic decline) from a financial point of view. Obviously, some drastic measures need to be taken to pick Ericsson out of its spiral economic decline and Ericsson management seem now to be on the road to taking major steps in this direction and hopefully reverse the unhealthy trend.

    For me it seems that one very important and critical aspect of this decline has not been put on the spotlight (at least not on the public arena as far as I can read) namely; the fact that “Innovation and economic growth are intertwined and in fact are two sides of the same coin”.

    It is well understood that much of the rise in living standards and economic growth of the industrialized world has come out of the innovative application of advances in science and technology during the creation and delivery of goods and services. And in today’s globalized market, innovative performance of enterprises is an even more crucial factor in determining their competitiveness and economic growth.

    Intellectual assets are key to value creation and play an important role in productivity growth such as improvements in the skill composition of employees as well as Intellectual Property rights. Studies have shown time and time again that investment in R&D contribute significantly to business performance and economic growth. In the field of ICT (information and communications technology) where Ericsson is actively operating, also investment in software is crucial as it can be accounted for a significant contribution of capital to the company growth.

    To investigate how this correlation between innovation and economic growth fits the problem of Ericsson’s revenue decline, I made some quick searching and analysis using a patent analytic tool, to see the patenting activities of Ericsson during the last decade. I was amazed, but I must say not surprized as to how close these patenting activities follow the revenue flow as shown below. Therefore, I felt the need to share my finding in this way as a way of putting the spotlight on the other side of “the coin” and hopefully draw some attention to other aspects of the task ahead of the new CEO.

    Graph2

    Note: The number of patented ideas from March 2015 and onwards are not complete due to the 18-month lag in publication of patents. However, a simple trend analysis comparing corresponding periods in 2014 and 2015, indicates that there will not be any major impact (see expected 2015 numbers in dotted line).

    The importance and role of innovation for growth has been reinforced both by globalisation and by rapid advances in new technologies, especially for ICTs, which have enabled new forms of competition and opened new markets for the creation and delivery of innovative products and services. Globalisation has also increased the pressure on these ICT enterprises to move up the value chain and engage in a continuous process of adjustment and innovation.
    Intellectual property rights [IPR] especially patents pose a particularly important challenge for an ICT company such as Ericsson, where knowledge is an essential factor of its growth, competitiveness as well as its market value.

    Falah Hosini
    CTO, IP & Innovation Expert
    IAMIP

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