The period from 1970 to 1999 was probably the most eventful in Ericsson's history. From having been a traditional telecom supplier, Ericsson was transformed into a leading-edge company in communications and information transmission. This development was the result of a systematic structuring and adaptation of the organization to changes in the market and investments in technical development. The effects are evident in the strong growth in both sales and profit.
On the surface, this growth seems to have occurred during the 1990s, but the foundation for Ericsson's expansion had already been laid in the 1970s. With its industrial base in electromechanical technology, Ericsson in the early 1970s had stable sales to customers throughout the world.
Starting in 1973, problems began to mount. The oil crisis and a deterioration in public finances in several countries led to a postponement of new investments and renewal of public telephone networks. Competition between telephone manufacturers increased. To stay in the running in bidding contests, it was not only necessary to press prices, but also at times to help the purchaser with financing. For Ericsson's weak financial resources, this was often a significant problem.
As the telecom market began to be deregulated in the late 1970s, opportunities were opened for Ericsson to enter markets that had been closed previously. The greatest interest was focused on the huge North American market. However, deregulation of telecom markets also led to a sharpening of competition, as nationally focused companies were attracted to global markets.
Although Ericsson had fared relatively well during the weak business cycles during the 1970s, net sales in fixed prices declined and profits suffered. Uncertainty in currency markets and a high rate of Swedish inflation during these decades contributed not only to driving up Ericsson's costs, but also to exchange losses. The situation did not improve until the Swedish currency was devalued in 1981 and 1982.
Towards the mid-1980s, net sales and profits rose somewhat. The improvement was primarily due to the introduction of the AXE system almost ten years earlier, but was also in part a result of the diversification of operations that was initiated in the late 1970s and early 1980s. Through these investments, Ericsson sought not only to retain its position in telecommunications technology, but also to establish itself in distributed data processing and office automation. This meant a broader product portfolio than previously, as well as the acquisition of companies that were not directly involved with telecommunications. These investments were made in parallel with an intensive research effort in data communications.
Successes for new technical platforms, including the AXE system, however, meant that Ericsson in the mid-1980s decided to concentrate its operations on the company's core business. It was concluded that data and telecommunications would develop rapidly in the latter half of the 1980s and the 1990s and that it would be necessary to consolidate operations to be able to defend the positions the company had already attained in these areas. As a result, operations were divested that were not linked to communications and efforts were devoted to developing system solutions that corresponded to market demand and that could be adapted to specific customer requirements.
In the late 1980s and 1990s, Ericsson's operations were concentrated to the most rapidly growing markets. The company's production thus came to consist more of testing and assembly, rather than traditional manufacturing in which raw materials were refined into a finished product. The change resulted in a rationalization of the company's operations and retraining of personnel, but also that less capital was tied up in inventories, machinery and property. In addition, the new strategy meant that investments in digital technology were even more evident.
Over the short term, this change meant that certain costs were incurred and that neither sales nor profits developed particularly favorably. The major change, however, came in 1994, with the breakthrough for digital mobile telephony - embodied by the GSM standard - which resulted in sharply increased sales and earnings growth. By the end of the 1990s, Ericsson's profit amounted to 8 to 10 percent of net sales, which can be compared with profit ten years earlier, which was between 4 and 5 percent.
Author: Mats Larsson
EUA = Ellemtel Utvecklings AB, a joint venture project between Ericsson and the swedish Telecom.
AXE system, circuit card, 1984
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