Telecommunications

RECALL No3

Innovation@Scale

RECALL No 3 – Innovation@Scale

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Welcome ...
... to the third issue of ’Recall, the publication by McKinsey that provides marketing and sales insights for executives and board members in the telecommunications industry. This issue focuses on Innovation@Scale – a proven approach for building new, scalable platforms for economic value creation driven by the introduction and rollout of new products, services, processes, or business models. Innovation@Scale implies that managers break with the key conventions or orthodoxies that have been instrumental to the historical success of big companies or institutions. As a result, it leads to sustainable and financially meaningful improvements in performance. Historically, telecoms operators have not been the innovating driving force. Many innovations in the telecoms industry have been developed by equipment manufacturers, while operators have focused on integration and rollout. We strongly believe that operators can do much better and leverage their unique assets, e.g., their customer insights, integration, and rollout capabilities to identify the “right” products for their clients. This would allow them to evolve into an industry-shaping role and to drive Innovation@Scale. Discussions regarding innovation typically center on new features or technologies – innovation in the telecoms industry is a key success factor and one which most industry players spend much time contemplating. As you might expect, this issue of ’Recall does not disappoint in this crucial area. In fact, we have collected “99 ideas” – innovative new services that have been or are about to be launched worldwide – and have collated them on an attractive poster for your convenience. (For more “ideas of the day,” visit McKinsey’s Telecoms Extranet at http://telecoms.mckinsey.com). Innovation@Scale goes beyond features or technologies – it is a system that allows companies to create value on a continued basis. In addition to the “what” of innovation, we also discuss how industry players can best achieve Innovation@Scale. We argue that the innovation paradigm needs to be changed. The industry has historically viewed innovation as a process that moves linearly from research through development to commercialization. We believe this perspective to be far too narrow and that telcos risk rapid commoditization if they fail to turn this process into an integrated, complete approach that includes technology insight and foresight, awareness of customer needs, and industry dynamics. In this issue of ’Recall, we explore a number of different facets of innovation. Part one, “Our Digital Future,” introduces eight key trends of how digital technologies will continue to shape the future of business and society in both conventional and novel ways. We then provide a deep-dive into the driving force currently animating the industry – virtualization – in part two, “Making the Unreal Real.” In part three, “Turning Insights Out,” we describe a five-step approach to systematic, successful product development while mastering the dual challenge of efficiency and effectiveness. The next part, “Moving Beyond,” reveals how incumbent telcos can capture opportunities beyond their core business. Part five, “Making Giants Move,” demonstrates the pivotal role a corporate business development unit can play in nurturing potentially disruptive innovations. Successful innovators differentiate themselves in multiple ways, part six, “Cracking the Code – Benchmarking Results,” provides an overview of results from our largescale innovation benchmarking survey. In “Start it Up”, part seven, we then show how to overcome the innovation dilemma by providing a four-step approach. This ’Recall issue concludes with an interview with Nokia’s Head of Strategy, “How Nokia Does it - What it Takes to Innovate@Scale Year after Year” Between chapters, we provide a number of vignettes on the “what” of innovation: the B2B crossroads challenge in ICT (information and communications technology) services; the rise of Telecom 2.0; the prospects for both instant messaging and the third screen; developments in mobile search; and advances in digital marketing. Our thanks go to our innovation expert Fabian Billing who was the driving force in putting this issue together. We are confident you will find this issue of ’Recall compelling and that it will provide unique insights and ideas relevant to your daily work. We look forward to your feedback and any thoughts you may have regarding topics that you would like us to cover in the future.

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Jürgen Meffert European Leader of McKinsey’s Telecommunications Practice

Pedro Mendonça Leader of McKinsey’s Marketing in Telecommunications Practice

Boris Maurer Leader of McKinsey’s Telecommunications Extranet

Thomas Barta Leader of European Telecoms Branding / ROI, Editor ’Recall

RECALL No 3 – Innovation@Scale

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Contents
01 02 03 04 05 06 07 08 Our Digital Future Making the Unreal Real Turning Insights Out Moving Beyond Making Giants Move Cracking the Code – Benchmarking Results Start it Up – Four Steps to Overcoming the Innovation Dilemmas of the Industry Innovate@Scale – How Nokia Does it 9 17 25 33 41 49 57 61 67

Appendix

RECALL No 3 – Innovation@Scale Our Digital Future

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01 Our Digital Future

We are strongly convinced that digital technologies will continue to shape the future of business and societies not only in ways we have observed in recent years, but also in novel ways as a driver for Innovation@Scale. Based on our client experience as well as on research we have done within the McKinsey Technology Initiative (MTI), we propose eight key trends for our digital future. After the boom and bust of the Internet bubble, there has been a heated debate about the real impact of ICT on businesses and society. Looking at the way information technology has changed businesses in recent decades, it is clear that it is an industry-shaping technology; not more than – but definitely not less than – electricity or even steam power were before. The ways of working in industries such as banking have fundamentally changed thanks to back-office automation and workflow support. Even more visible have been the comprehensive upgrades to the customer experience – customers today can expect to interact with businesses through a multitude of channels in a more or less integrated manner.

In other words, ICT accelerates and amplifies the forces that lead to creative destruction and the resurrection of an industry. It is also an opportunity for Innovation@ Scale in the industry. The bursting of the bubble had a healthy and sobering effect. The adoption of ICT brings with it a fundamental shift in the way people work and interact with each other – it drives virtualization of interaction and transact ion. Such shifts do not occur over night, but take years or even decades. In many respects, however, such shifts in behavior and mindsets have already taken place and there is a lot of room for the diffusion and leverage of technology. Today, there is still a large disparity in technology use across sectors, regions, and job types (Exhibit 1). Financial industries, for example, are far more advanced in their use of ICT compared to, say, the healthcare sector. The type of work that is strongly supported by ICT is mostly of a transformational or transactional nature, and ICT helps to automate workflows. The growing numbers of interaction workers are just beginning to see their working environment changed by ICT. From a geographical point of view, even regions with similar GDP per capita have very different ICT penetration rates. Highly interactive technologies in the context of Web 2.0 are spreading quickly, with their use focused on collaboration and knowledge management. In our survey, we found that executives recognize the importance of ICT to global business and profitability (Exhibit 2).

Information and communication technology (ICT) will drive virtualization and will continue to have a transformational impact on business and societies
Superior use of ICT is a discriminating factor in many industries. As stated by Professor McAfee of the Harvard Business School, more IT-intensive industries are much more “Schumpeterian” than less IT-intensive ones.

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Still room for technology diffusion and leverage

For customer interactions and, in part, for internal interactions, companies increasingly make use of Web 2.0-type technologies. A very important and new trend is that technologies used in the private space are making their way into the workplace at an accelerated pace. After steam and electrification, computing has shown a similar transformational power. While the impact of ICT is comparable with other groundbreaking technologies, its adoption is faster. Nevertheless, there is still a significant time lag between technology innovations and innovating business systems with the help of those technologies. Today, we are seeing the first indications of a second wave of ICT-enabled transformation focusing on interactions. Although adoption times and innovation cycles are getting shorter, the gap is still large between when the technology becomes available and when new business systems successfully use it.

Trends in managing talent and labor
Trend 1: Distributed co-creation. This term refers to the harnessing of communities to create end products and intellectual property via a collaborative, iterative, and distributed process. Firms making use of this trend gain access to a large, global labor pool that is motivated by reputation, learning, and a sense of community rather than strictly financial remuneration. The scale and diversity of this labor pool accelerate development and create highly tailored products that often have higher quality, significantly lower cost, and faster design cycles than products and IP created with traditional methods. Examples include Wikipedia, an online encyclopedia updated by volunteers, which is now 12 times larger than the Encyclopedia Britannica; Loncin, which iterated motorcycle design with vendors to drive down cost and capture 70 percent of the Indonesian market; Linux, an open source operating system; and OScar, an “open-source car.” Trend 2: Prosumers. “Prosumption” is the increased involvement by customers and end users in various aspects of product design, development, marketing, selling, and servicing. Just as technology allows businesses to interact more directly with their customers, the next logical step is the inclusion of customers

Key ICT-enabled business trends are emerging
We see key trends emerging, which will help to transform specific businesses (Exhibit 3). These trends concern managing talent and labor; managing capital and assets; and integrating information and optimizing business logic.

RECALL No 3 – Innovation@Scale Our Digital Future

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Executives recognize the importance of ICT to global business and profitability

directly into value-delivery systems. Hence, the roles of consumer and producer are becoming less distinct. Companies are able to bring more desirable products to market faster and create higher customer loyalty. Companies can involve prosumers in several ways: by engaging lead users in product design (e.g., Gmail’s perpetual beta program, Threadless T-shirt designs); by harnessing the “wisdom of crowds” in the creation of a product or service (e.g., voting on popular articles via Digg, predictive markets such as TradeSports); and by leveraging broad user bases to test and market goods (the Tremor word-of-mouth marketing communities). Trend 3: Firm of one (firm of one billion). This trend is manifested in the coordination and management of talent pools beyond the traditional captive employee relationship – leveraging contractors, free agents, talent networks, and communities. Companies developing these talent pools can tap the required expertise quickly and efficiently. Furthermore, this change in the nature of the labor relationship could drive changes in pricing models, potentially moving from payment for time to payment for results. Examples include Goldcorp’s “find the next six million ounces of gold” competition, in which the company shared all its geological data publicly and offered USD 575,000 in prize money to

winners; and TopCoder, a loose organization of software developers that coordinates the development of complex software projects through a distributed model. Trend 4: Interaction facilitation. This term refers to enhancing the productivity of employee interactions and knowledge work through flexible work environments, technologies, and new management practices. Applications such as NetMeeting and videoconferencing software increase the effectiveness of workplace interactions (whether in person or remote) and lead to higher productivity and quality. These tools also increase the size of the workforce by overcoming geographical restrictions to create a remote workforce. Examples include Best Buy’s Results-Only Work Environment, where employee performance is judged on output instead of hours, so that employees can work wherever and whenever they want as long as they get things done; and JetBlue Airways, where “work-at-home moms” constitute the entire reservation system workforce, requiring little more than a telephone and a broadband connection.

Trends for managing capital and assets
Trend 5: Converged automation. Such automation leverages large networks of connected computing platforms, devices, and tagged objects and data. The declining

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3 persistent themes feed key ICT-enabled business trends

cost of IT, increasing labor costs in developed economies, and declining pools of labor resources in some regions (such as Japan) are driving this trend. Examples include increased emphasis on selfservice at retailers such as Home Depot, where customers can scan purchases and pay through automated machines, and the METRO Group, which has implemented self-service checkouts, electronic price tags, and information terminals. Other examples include the use of robots by ALSOK, a Japanese security company, as part of its integrated security service, and Airbus’s deployment of RFID tags to detect automatically safety risks and repair needs in its aircraft. Trend 6: Unbundled production. The opening of assets and production systems to outside firms increases asset utilization and potentially creates new product offerings. Technology now enables the disaggregating, measuring, metering, and billing of smaller and smaller increments of an asset. This capability leads to better utilization, faster deployment, increased flexibility, and more attractive consumption options. Examples include Amazon.com’s leverage of its spare storage capacity to launch a new service offering, whereby developers gain access to a highly reliable and scalable infrastructure that is priced on a

pay-as-you-go basis; Flexcar, which manages a fleet of vehicles for customers to rent in small increments; and Virgin Mobile USA, which leases part of Sprint’s cell phone network and resells under its own brand name.

Trends for integrating information and optimizing business logic
Trend 7: Data-driven operations and management. Also known as “the new management science,” this term refers to the use of multi-source, multi-structure data for decision support, data-driven management, bottom-up innovation, and information flows to develop competitive advantage and create new business models. Technology now enables the capture and analysis of highly specific data about company performance, which is having a significant impact on management practices (e.g., performance management) and IT management (e.g., dashboards). Technology also enables the capture and analysis of in-depth data on customer behavior and preferences (such as pricing response), which allows companies to identify customer needs in an increasingly customized market (due to the “longtail” effect) and to build lasting customer relationships based on strong e-CRM capabilities. Examples include CEMEX, which uses a large wireless network to

RECALL No 3 – Innovation@Scale Our Digital Future

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Decision makers need to expand arenas for managerial innovation and economic impact

optimize loads and routes and improve deliveries, with a significant impact on its clients’ construction times; and Google, which draws on an internal idea market in which employees can vote on whether to pursue ideas submitted by their colleagues. From a customer-facing perspective, The Progressive Corp. prices auto insurance based both on information provided by the user (such as miles traveled per year) and estimated pricing from other providers; Harrah’s uses customer profiles to make targeted offers and provide exemplary customer service; and Amazon.com offers a recommendation engine based on an analysis of customers’ purchase histories. Trend 8: Information for sale. New business models are emerging around the aggregation and sale of information, including pricing and related data, and IP. This trend is driven by an increased demand for information for analysis; an increased supply of information created by data capture methods; and an increased ability to sell information generated by better search processes, cataloging, and comparative pricing. Examples include eBay’s sale of pricing and other productrelated data, and IBM’s generation of 15 percent of its R&D budget through licensing and custom development.

The potential for impact is large – managers, policy makers, and lobbyists need to prepare to manage the change
We have found that the above trends are likely to cause up to one quarter of value creation to change hands, with significant variations across industries. As part of the process, value chains are breaking up and reforming. Furthermore, economic surplus will change hands between players within the same or different industries, and in some cases might be transferred to the end customer. While the impact of ICT is strongest on the interaction types of work, the key trends will also affect less interaction-intensive industries such as consumer goods and pharmaceuticals. To take advantage of the opportunities ahead and to avoid value destruction, decision makers need to expand their arenas for managerial innovation and economic impact in five dimensions (Exhibit 4): New economic models are emerging that will create new industries and potentially destroy existing ones. Not only will economic surplus change hands, but also the way products and services are created, generated, distributed, and paid for will change significantly.

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Opportunities from the Internet: The Rise of Web 2.0 Technologies
A new set of Internet technologies – dubbed Web 2.0 – is aimed at harnessing the creative and collaborative nature of online interactions. Results from a recently released global McKinsey Quarterly survey suggest that most companies are pursuing these technologies with a clear-eyed understanding of what they want from Web 2.0. McKinsey & Company wanted to better understand where telecoms companies find themselves regarding this new wave. Are they already investing? Do they consider Web 2.0 technologies to be critical for their organizations? A number of new telecoms attackers – from Skype to Jajah and Rebtel – have already begun to introduce such product and service innovations. McKinsey learned that telecoms is indeed moving faster than the average industry in adopting Web 2.0 technologies on a worldwide basis but that in general, is doing so mostly as a result of competitive pressure. This adoption pace is clearly influenced by the more successful adoption of Web 1.0 and because it is more business than IT driven. In general, this will be done through better customer interfaces and more flexible internal knowledge management. Within the consumer segment, for instance, products such as voice are being commoditized and Web 2.0 can create new “sticky” services to compensate. In addition, competition may well foster new services that continue the erosion, such as “mash-up” voice opportunities (i.e., the blending of different technologies) or the spread of podcast-infused reviews of products and services. Regarding revenue growth, the objective is not only about attracting new customers, but also about creating more leverage with customers. McKinsey also identified a small core of companies that represent the bulk of so-called Telecom 2.0, which are redefining their organizational boundaries in order to generate new competitive advantages. These technologies are being used in more openly collaborative ways – both internally and externally – with consumers and suppliers or to create new products and services such as mash-up voice applications and others. The jury remains out as to whether this phenomenon will lead to a promising competitive edge. However, this small core of companies also claim to have benefited the most from the advent of Web 1.0, which would appear to suggest that they will succeed here as well. This article is an excerpt published originally in McKinsey’s Digital Content and Services brochure, 2007. By Jacques Bughin and James Manyika

Organization, talent, and management models/science are changing rapidly. The share of tacit interactions will grow quickly, thus demanding new ways of attracting and developing people. Organizations will change their faces and will be less and less constrained by company borders. The game plan for strategy, innovation, and competitive advantage will dramatically change. With sources of value shifting and with new business models emerging, the nature of competition will change. Already today, it is evident that creative destruction is much more powerful in IT-intensive industries. Value chains are breaking up and new ecosystems will emerge, leading to significant changes in industry

structure and performance. We have already seen in the first waves of ICT proliferation that hardly anybody was able to predict accurately the winning organizations. The macroeconomy and whole societies are strongly affected by the changes; for example, globalization will be highly influenced by ICT. The changes in the way people interact will also lead to significant shifts in our value systems and challenge some of the common grounds for consensus in today’s societies. At both an industry sector level and a macroeconomic level, there are significant risks alongside the huge opportunities. Policy makers and lobbyists need to create an environment that helps to capture the opportunities

RECALL No 3 – Innovation@Scale Our Digital Future

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and avoid the risks. Different regions might capture the opportunities in a very different way. Moreover, some of these ICT trends provide challenges for legal and ethical frameworks. *** The transformational power of ICT on businesses and society has been substantial and will increase in the years ahead. We have identified eight key emerging trends, which are changing the way talent and labor,

as well as capital assets, are managed. Furthermore, information is becoming more strongly integrated and business logic is changing fundamentally. Such trends have the potential to make one-third of value creation change hands. Managers as well as policy makers need to be prepared to capture the upside of this huge potential. By Rolando Balsinde, Markus Löffler, James Manyika, and Pål Erik Sjåtil

RECALL No 3 – Innovation@Scale Making the Unreal Real

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02 Making the Unreal Real

This part examines the industry’s main animating force – virtualization – and why incumbents must confront it. Telecoms players operate in a turbulent world of technological leaps, regulatory shifts, and customer preference swings. Since the intensity of these forces appears ready to surge, not subside, it’s worth reflecting upon how the industry got to this point and where it’s headed in the future. The telecoms industry arose on the back of a massive discontinuity: “virtualization,” which we define as making objects and actions available independent of location and/ or time – in effect, transforming them from the physical to a virtual, non-physical form. Roughly 150 years ago, virtualization meant the invention of the telegraph and Morse code, and of the telephone (first commercialized, respectively, in the 1830s and 1870s). These innovations made data transmission and voice communication location-independent: thus configured, they began to displace traditional messenger and delivery services. Early milestones in the virtualization of voice communication included the 1866 completion of the first successful transatlantic telegraph cable and the first transcontinental phone call (from New York City to San Francisco) in 1915. Over the past several decades, virtual communication has come to fully inhabit the mass market, fueled by many technological advances that include the miniaturization of devices and the invention and proliferation of the Internet. Today, virtualized communication comprises ubiquitous wireless service, rich multimedia interaction, and

the transmission of data via e-mail and the Internet. Furthermore, the virtualization of adjacent industries continues apace in areas such as search, advertising, payments, and transactions. We even see the complete virtualization of consumption patterns, and personal and social networking, as well as economic activity in communities where people spend time, money, and perhaps even build completely virtual business models. McKinsey & Company research shows that the increasing availability of bandwidth predominately drives telecoms virtualization, constantly leading to fundamentally new models of value creation and creating opportunities for new “virtual” IT-based businesses. Since telecoms players can operate at low marginal costs after infrastructure investments are made, the virtualization of communication over time has actively cannibalized traditional industries, such as the postal service. This historical pattern of creative destruction makes the telecoms industry what it is. At the same time, we are beginning to see increasing levels of virtualization in transactional industries (from banking to bookselling) – a process in which traditional telecoms players themselves come under fire from new, Web-based attackers. Thus, while traditional communication moves into a “flat” world with no real differentiated value creation, the next fundamental wave of creative destruction driven by virtualization has already taken flight. This publication explores virtualization and how bandwidth-borne innovation provides the thrust that moves the telecoms industry (and many others) forward. This article covers future strategic imperatives for telcos and how they can act to shield, expand, and capture their

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The future will see major virtualization battles on the one side and ICT enablement on the other

current positions in the industry in order to emerge successfully from the future virtualization battles. In the following, we will further explore ways to capture new business opportunities and examine telecoms innovation and corporate business development.

virtualization battles on the one side, while companies on the other will require submersion into information and communications technology (ICT) in order to avoid being left behind – which could be a major opportunity for integrated telecoms players (Exhibit 1). Today’s virtualization battle is being waged between communication- and transactional-level players, as next-generation communication technologies are introduced and online banking, e-commerce, and m-payment programs go into effect. It’s expected that the future will be characterized by strong networked communities, with high levels of rich interaction and seamless communication in a converged world. That means the emergence of seamlessly available “digitizable” goods (e.g., software, content, etc.), the proliferation of mobile devices, and ubiquitous broadband access.

From broadband to “megaband”
How certain is the industry of continued broadband expansion? Edholm’s Law, named for Philip Edholm, Nortel CTO, provides one perspective. It states that wireline, wireless, and nomadic access bandwidth will grow at the same predictable exponential rate, and it has been surprisingly accurate over the years. This track record seems likely to continue. Thus, the expected shift from broadband to “megaband” in the future should further drive virtualization across different sectors – from goods-producing industries to transaction (e.g., financial services) providers to the communications industry itself. For example, the continued rollout of “Web 2.0,” with its power to allow users to individualize applications, products, and services, enables a broad cross-section of “traditional” industries to create virtual products for, and profit from, the Internet. However, industries typically include companies that lead the way towards virtualization and those still not aware of the trend. This means that the future will likely see major

Three strategic imperatives: Shield, expand, and capture
Increasingly enveloped by competitive pressure, telecoms players need to address forthcoming virtualization discontinuities in strategic terms. The McKinsey team has identified three strategic imperatives telcos must achieve to defend core business assets and defeat virtualization challengers: shield, expand, and capture (Exhibit 2).

RECALL No 3 – Innovation@Scale Making the Unreal Real

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3 strategic imperatives for telcos to defend core business and win virtualization battles

1. Shield (the rebalancing/bundling game). Telcos must shield existing revenue in their core businesses by, for example, migrating customers to flat-rate service plans and messaging packages, bundling existing services, or bundling new services. 2. Expand (the market share game). Telcos need to exploit the remaining opportunities in core markets (e.g., by addressing under-penetrated customer segments) and drive best-in-class category management. 3. Capture (the innovation game). They must also understand and evaluate new opportunities beyond their core businesses that can serve as future growth drivers. The strategic imperatives – shield, expand, and capture –focus on the three layers of the virtualization framework, with shield concentrating on fixedmobile convergence (FMC) as an example opportunity, expand dealing with category leadership, and capture focused on innovation.

mobile connections in 2007 to nearly 10 percent in Germany and to more than 6 percent overall in western Europe. Because the market appears ready to emerge, a number of basic beliefs concerning short-term FMC have also surfaced. An integrated player, for example, might embrace the following notions regarding FMC: 1. Consumers desire many of the benefits associated with convergent offers. However, with telecommunications being a relatively low-involvement product category, price remains one of the key drivers. 2. Successful fixed-mobile convergence products typically come from attackers that usually have nothing to lose in breaching market conventions. This tends to give their offerings “clarity of purpose.” 3. An opportunity exists for incumbents to profitably exploit latent demand for convergent offerings. They can target these products towards customers on specific grounds, depending upon the strategic segment (e.g., fixed-mobile customers, fixed-only, or mobile-only customers, etc.). Doing so can allow them to create revenue lock-in, reduce churn, engage in targeted cross-/up-selling, and roll out segment-specific attacker models.

Imperative No. 1: Shield – shielding traditional telco revenue by promoting FMC
FMC uptake is expected to expand dramatically in the next few years, rising from a fractional share of total

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4. A successful product management process usually features four steps (which McKinsey calls the CHESS approach): a. Establish needs-based customer clusters based upon market research (What jobs should the offering do for different customers?) b. Identify and evaluate opportunities in each strategic segment (Where do blank spots exist, and where can converged and next-generation offerings do the job?) c. Design products to address the needs of each strategic segment (Which propositions serve that purpose best?) d. Create a communication platform for marketing the products to specific sociodemographic segments (What is the best way to penetrate the market, and what story should be told?). Thus, for incumbents, fixed-mobile convergence in the short term is all about strategically placing the right FMC products in the right segments at the right times. It also involves ensuring that products are attuned to the market needs of the segments for which they are targeted. Telcos interested in developing a next-generation/ convergence roadmap can begin by generating a complete list of potential convergent offerings and then scanning for opportunities for new product ideas. During this process, product managers must take a customer needs perspective rather than focusing too much on new technologies; scanning the product offerings of players from more-advanced markets can generate additional ideas. With the list of potential FMC offerings in hand, managers can prioritize by evaluating each product along two dimensions: first, based upon its attractiveness to strategic segments (e.g., fixed-mobile customers, fixed-only or mobile-only customers, or competitors’ customers) and second, in terms of its match with the needs and requirements of prioritized customer segments. Two recent examples reveal how technological advances can be used to address specific customer needs and drive convergence. In the United States, insufficient in-home network coverage is the key driver of mobile churn; at the same time, due to low population density, improving network coverage is more costly than in most west European countries. To address this pain point, carriers are developing innovative new technologies.

For one, a number of tech companies, including Motorola and Google, are investing into the development of femtocells, an in-home access point that uses a highspeed Internet connection to route a call from a handset to an operator’s switching station. For users, this technology promises uninterrupted mobile telephony at home and for carriers, it could result in vastly increased network capacity and hence, lower capital expenditure (capex). Another example is T-Mobile USA’s new HotSpot@ Home service, which uses dualphones – able to use both WiFi and GRS access technologies – to enable users to make free calls over their home wireless network. This approach also helps T-Mobile boost its network coverage with only moderate capex charges. Thus, the launch timing of FMC or next-generation messaging products should address three key issues. In terms of competitive pressure, must a telco match specific competitor offerings to avoid losing market share? Regarding regulation, what are the implications of launching a particular product? And finally, addressing technical feasibility, what is the timeline for the technical realization of the product? In light of these issues, it often makes sense to conduct an expert appraisal of a telco’s current offerings and its newly developed roadmap. For example, one such appraisal, which leveraged outside experts (i.e., McKinsey) without ties to the company, found that the telco’s current convergence portfolio and roadmap covered all of the right products, with most of the promising options having already been launched or being considered for launch in the next year or two. However, the appraisal also noted that until recently, the telco’s convergent offerings took too much of a technology perspective and lacked a clear purpose or strategic focus. Given these findings, the McKinsey team recommended that overall, the telco needed to think about convergent offerings in a new and strategic way in order to ensure strategic focus and clarity of purpose. In addition, McKinsey also deduced specific product recommendations to strengthen the existing portfolio.

Imperative No. 2: Expand – collect the remaining core business opportunities by driving best-inclass category leadership
The second imperative concentrates on expanding current business opportunities in core telecoms markets, which means driving best-in-class category management. Reaching this level of performance typically requires a different approach from today’s practices. Integrated players, for example, often rely upon separate product

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development teams in their fixed and mobile business units, and usually organize product development and management according to individual offers (e.g., price plans), services, and enablers. Typically, no integrated customer lifetime value (CLV) assessment is undertaken; the organization has not assigned overarching P&L (profit and loss) responsibilities and it lacks a joint definition of what success looks like. The challenge involves shifting this mindset towards the creation of an integrated product delivery system that stretches across both fixed and mobile business units. In this case, the product categories themselves become the organizing principle behind product development. This means having dedicated teams for each category, assigning clear P&L responsibility for category managers, introducing an integrated value management process per category that’s focused on CLV, and creating unified targets and success criteria per category. Telcos must work to achieve category management leadership by fully integrating customer insights into the product development process. This entails making the shift from discrete market research, data mining, and customer segmentation activities that focus primarily on reporting, to the development of real customer insights, fully integrated into the product and innovation processes. Driving category management leadership in terms of segment-specific offerings and mass customization requires a focus on price/value, value differentiation, and customer segments. Price/value represents the most important lever telcos can use to influence customer buying decisions and create loyalty. Given the cost positions of most incumbents, value differentiation becomes a key lever because these players can’t realistically compete on price alone and face the threat of customer-based cannibalization if they attempt to do so (but smart pricing remains important, nonetheless). Incumbents also need to develop a segment-oriented understanding of customer preferences and reasons for churning in both their fixed and mobile business in order to effectively target “pain points.” McKinsey’s research shows that customers seek strong price/value and segment-specific offers, which provide the best insurance against churn. Incumbents face fundamental challenges when developing segment-specific offerings/bundles and successfully mass-customizing these offerings:

Segment-specific offerings/bundles. Telcos can act to capture untapped value potential in markets by introducing segment-specific offers instead of pursuing “one size fits all” strategies. Doing so, however, will require them to build superior customer analysis capabilities, since they must identify under-penetrated (but valuable) customer segments, design needs-based offerings, and promote them to the specific customer target segments. Mass customization. Here, telcos build up the capabilities necessary to create mass-customized offerings as a key part of their differentiation strategies. These offerings can be especially valuable for creating cross- and up-selling opportunities, and for reducing subscriber churn. Conceptually, mass customization involves the establishment of standardized product modules and standard offers, which are overlaid with special custom features and services or quality levels to create segmentspecific offers. Common in the consumer electronics and personal computer industries, mass customization provides the cost-efficient flexibility needed to meet the requirements of specific customer segments.

Imperative No. 3: Capture – transform the company’s innovation performance to Innovation@Scale
The third imperative involves establishing a healthy innovation system, capable of driving Innovation@Scale. Innovation@Scale means building new, scalable platforms that trigger economic value creation via new products, services, processes, or business models. Furthermore, these must be sustainable and financially meaningful to a major corporation. In the past, telcos failed to create Innovation@Scale, since technology and equipment vendors provided most industry breakthroughs. However, the McKinsey team believes that virtualization allows operators to take on a different role in the innovation game. But, to do this, telcos need to change the ways in which they involve customers with their product offerings, radically reduce complexity, orchestrate a shift in mindset, and establish an effective innovation system. Customer involvement. The telecommunications industry traditionally provides customers with what could be characterized as low-involvement offerings. This means that most customers aren’t interested in raising their attention levels regarding telecoms services, in increasing the number of purchasing decisions, or in engaging in relevant interactions with telecoms players. Telcos thus need to develop capabilities that make them

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Opportunities in B2B: Telcos Face an Enterprise ICT Crossroads
Research shows that the decline of Europe’s enterprise fixed-line revenue and margins will cause operating profits to plunge by 5 percent per year over the next five years. One of the few real expansion opportunities for the industry resides in information and communications technology (ICT), where growth could reach into the double digits for individual services. Several telecoms players have already initiated moves into the ICT space, with most of the activity centered on infrastructure-focused ICT services. When and how telcos should move to capture their share of the ICT market largely depends upon two strategic variables: whether it makes sense to enter the ICT market from a specific company’s perspective based upon relative attractiveness; and how quickly telcos need to react, determined by the amount of pressure felt by their telecommunications business. Telcos interested in entering the ICT space need to answer four sets of baseline questions that can prepare them for the challenges ahead. 1. Where to play. Telcos interested in expanding their participation in the enterprise space can choose from a wide variety of services. These include basic network services, infrastructure-focused ICT services, or integrated ICT services. Plays in each area can range from basic services (e.g., hardware or software maintenance) to managed services (e.g., out-tasking) to VAS (value-added services). 2. How to play. Numerous alternative business models could be deployed for each service, a few of which include: full player, wholesaler, integrator, distributor, or service developer/white-label player. 3. How to build the service business. Telcos can choose from among several possible paths when entering infrastructure-focused IT services. They include plays focused on pure organic growth; a series of medium-sized, focused acquisitions; the “big bang” acquisition of a large IT player; a joint venture with an IT player for network-centric ICT services; or a deal to swap IT outsourcing with an IT player for network-centric ICT services. 4. How to achieve execution excellence. Questions that arise in addressing this issue include: Should the business be run as a separate or fully-integrated entity? How does a telco run an efficient service “factory,” and how does it optimize each service line and achieve service rollout? What processes must be developed, and what go-to-market/channel strategies need to be established? Most importantly, how does the telco ensure sufficient profitability? By Peter Karlströmer and Katrin Suder

more relevant in each interaction they have with the customer, which can be driven by introducing CLM (customer lifecycle management) techniques and building overall customer insights. Complexity management. Complexity represents a key inhibitor of innovation flexibility and speed. Incumbent telcos must manage hyper-complex legacy systems and processes that no longer create value and instead, prevent them from following a more flexible and insight-driven approach towards customers. A paramount challenge for telcos involves finding ways to use the opportunities presented by the next virtualization

discontinuity to pursue radical, greenfield approaches in the place of current legacy systems, since these cumbersome elements will not play major roles in future telecoms value-creation opportunities. Shift in mindset. Operational changes alone will not be sufficient, since most incumbent telcos carry cultural legacies of former state-owned monopolists. Tackling the transformation challenge requires telcos to drive entrepreneurialism, encourage risk taking, and foster the willingness to experiment on the one hand, while abandoning bureaucratic, slow-moving, and short-termoriented behavior on the other. These changes require

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significant effort, potentially different organizational structures, and strong commitment among top managers to make it happen. Innovation system. In the end, telcos must establish an effective system to drive Innovation@Scale. There must be a clear innovation strategy that defines selected bets and an effective execution approach that addresses the specific challenges inherent in radical innovations. Sticking to standard stage-gate processes won’t work for transformational innovation themes. Instead, different organizational settings that allow more flexibility and focus will be prerequisites for success.

*** Virtualization casts a long shadow over the telecoms industry, both as the creator of the current industry and as the inevitable destroyer of today’s status quo. While virtualization threatens the incumbent industry, it also provides potential new ways to capture growth for nimble players – which could include incumbents. McKinsey is confident that the information in this publication can help incumbents both understand and prepare to leverage the coming virtualization-driven discontinuities that will be faced by the telecoms industry. By Jens-Olaf Berwig, Fabian Billing, Jan-Christoph Köstring, Christian Kraus, and Boris Maurer

RECALL No 3 – Innovation@Scale Turning Insights Out

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03 Turning Insights Out

Focusing product development squarely on what customers need is now the maxim in the vast majority of consumer markets. Many companies have tailored their product management to the requirements of the market and hence their customers or have given their marketing and sales departments a say in the product development process early on. At least in theory. In practice, this model is still encountering huge problems: nowadays, products need to be developed faster and faster, with tighter budgets and, above all, a very high degree of accuracy. Such product development to order requires maximum efficiency with maximum effectiveness. This is the dual challenge currently facing product and marketing managers in almost all industries. The environment of customer-focused product development is currently marked by three trends: the fragmentation of customer segments, especially in saturated markets, their decreasing stability as a consequence of ever-growing needs, and the demand for greater and greater efficiency in the overall process, including in product development.

expectations. This type of person does actually exist, examples being talented entrepreneurs like Apple’s Steve Jobs, Virgin’s Richard Branson, Dietrich Mateschitz from Red Bull, or Lawrence Page and Sergey Brin from Google. These are people who hold onto and defend their vision in the face of internal and external opposition. The advantage of this approach is that a good idea for a product comes onto the market undiluted. Particularly in the case of highly innovative products, organizations tend to weave too many security webs, which often weaken the creative core of the idea. The obvious disadvantage of this is that an organization becomes almost totally dependent on this one person with visionary thinking: as soon as the captain jumps ship, the ship may start to roll. A good example of this is Michael Dell, founder of the computer company of the same name, who was reinstated as CEO in 2007 less than three years after stepping down. The systematic process. In this approach, the entire product development process is highly standardized. Beginning with an in-depth understanding of the customer, it continues with the generation of ideas and testing of the ideas using market research methods, and concludes with the preparation and implementation of a business case. Companies that build on this systematic approach have three main instruments at their disposal for developing successful new products: In-depth understanding of the customer, on the basis of which motives and situations are compiled into corresponding propositions. Instead of rigid, general customer segments, e.g., by age groups or education,

Basic models of product development
When developing new products, companies can generally take two approaches – there are successful examples of each: The visionary. He is the bright star in any sector. Seemingly effortlessly he forecasts market developments, guesses customers’ future needs, and creates precisely those products that are rolled out contrary to all

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flexible affinity clusters are chosen to approach customers specifically and arouse their interest in new products. Use of an existing brand. The spotlight is on new products that are very well positioned in an existing brand and also have a strong brand fit. If this instrument is used correctly, the product launch throws a positive light on the brand image and boosts sales of existing products. Synergy effects are achieved in this way. Consistent use of meaningful KPIs (key performance indicators). Starting points like “degree of consumer acceptance in last quantitative test” ensure that the organization learns from its own experience and becomes more confident about making decisions over time. This procedure shortens the time-to-market and – especially in view of the variation in needs and the explosion of supply – increases efficiency. The systematic process has one obvious advantage: because the process is standardized, employee turnover does not jeopardize a company’s success. At the same time, the company can learn from its own experience as KPI measurements can be easily integrated into the process. A possible disadvantage is that over-standardization might lead to genuinely innovative ideas being discarded far too early or tested to death. The following section describes the systematic process in more detail. Although this approach has been practiced at many companies for years, successful application of the different steps cannot always be taken for granted – best practices stand out everywhere.

is what is needed. The topic should be formulated sufficiently precisely to specify a direction, but at the same time be open enough to generate as many ideas as possible. At this stage, all available information must be gathered on this specified topic based on hypotheses and analyzed. The three most important areas to look into are knowledge about the customer, previous experience within the company, and the experience of other companies (best practice). Around 90 percent of all topics with practical relevance can be addressed with four types of analyses: 1. Customers’ use of and attitude to similar products. 2. Potential target groups for the new product, their needs, and buying motives (segmentation). 3. Image of the brand in this environment up to now (analysis of brand fit, brand panels). 4. Case studies of other products with similar challenges, either from the same industry or deliberately taken from other sectors. Things that initially appear very simple and logical in this list present many companies with difficulties in everyday business: the problem is seldom a lack of data, but rather its form and its interpretation. The really relevant findings need to be worked out and sufficient time planned in for this.

Step 2: Generation of ideas
Now the initial ideas are developed in various iterations and with as many different participants as possible. Experience shows that it is crucial to include all subsequent decision makers as well as the research and development (R&D) department at this stage. It may be particularly difficult to get senior managers with a full calendar to allot time for this, but if the project managers are not able to put the topic on their agenda at this point, the project will never have top priority. Another reason the R&D department must be involved is to leverage existing expertise and avoid the “not invented here” problem that leads many initiatives nowhere. In an international organization it may be useful to incorporate marketing or product managers from the most important countries as well. Workshops

Five steps to systematic, successful development
Product development processes usually comprise five steps. By adopting this approach, a company can gradually single out the ideas for products that have the greatest potential. If this procedure is implemented using a KPI Cockpit, i.e., an interface showing all KPIs updated daily, new ideas can be tested based on previous experience. This ensures a continuous learning curve at the company.

Step 1: Identification of customer needs
Even before any ideas are generated, it is important to define for which topic a new product is to be developed. Practical experience shows that an unsystematic approach is unlikely to be successful. “Controlled creativity”

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with between 10 and 20 participants have been shown to be conducive to the generation of ideas – preferably conducted by a professional moderator who knows how to open discussions but is also capable of producing results. An external expert, e.g., a trend researcher, can help to inject new insights into the group. The workshop should be divided into different, preferably varied parts so that participants can approach the topic from different angles. Various aids are available for this. IDEO, for example, has developed a set of method cards that include a large number of different innovation techniques – described in simple language with an example for processes, moderation, and a possible end product. The creative group should agree collectively on a product to be developed by the end of the day. A typical end product for a workshop day of this nature can be a concept for a product that specifies the target group, the value proposition, and the reason why.

Step 4: Qualitative test and preselection of concepts
Now it is time to test the particularly promising concepts with the target group. These tests have two aims: firstly, to separate the relevant from the irrelevant products, and secondly, to generate ideas and pointers as to how the concepts can be improved. Depending on what stage product development is at, two methods in particular are suitable: the focus group and the prototype test. If the concepts have already been fleshed out, focus groups are an efficient means of testing the suitability of the ideas as early and cost-effectively as possible. As consumers generally have trouble putting their desires and ideas into words, it is helpful if they can visualize things. If a prototype of a product can already be produced, the customer should be given the opportunity to experience the product first-hand, with feedback and background information on its use and consumer acceptance being gathered in detailed interviews. The focus groups can then be dropped. At the end of this phase, there should be five to six concepts left that will finally be tested in greater depth.

Step 3: Development of concept ideas
The ideas that the workshop generated are then enhanced. Depending on the sector, this may involve merely honing them (FMCGs, fast-moving items) or developing them in detail, e.g., with a cost structure (insurance industry). This step requires a great deal of care; after all, at the end of it the concepts are 80 percent certain and just need to be optimized or filtered out. At this early stage, it is a good idea to focus on the concepts that have the greatest potential. Three elements are particularly important: The cost should now be roughly calculated in any case, so that completely unprofitable products are rejected in time. This can be done on a top-down basis – the details can always be worked out at a later stage. Another possible feasibility check is the brand fit. Concepts that obviously do not match the brand essence should not be pursued further. On the basis of these two filters, an initial rejection process with senior management is essential to single out for further work the concepts senior management regards as being actually relevant. Around eight to ten product concepts should be left once this third step has been completed.

Step 5: Quantitative test and final selection of the concepts
The goal of the test that now follows is to create final versions of the best concepts from the customers’ perspective, rate their customer acceptance, draw up a detailed business case and, if necessary, finally test their brand fit. The traditional approach starts with a standardized questionnaire that is used online or in a one-on-one interview. Typical questions that are answered with standardized concept tests are the involvement effort, interest in the concept, appeal of the concept, compelling features, customer acceptance, and willingness to recommend to others. A clear drawback here is the direct question about customer acceptance because in the case of new products in particular it cannot be gauged against actual behavior. The results should therefore not be used 1:1 but on a discounted basis. The calculation of the brand fit gives clear indications as to whether the new product matches the existing brand. Questions relating to this can be included in the questionnaire cost-effectively and evaluated. If, for example, you ask people to name ten characteristics of

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01

Sample results: all results fit the image of the core market well; concepts 1 and 2 fit it best

the concept to be evaluated that are identical to those of the existing brand, the correlation between the evaluations shows the proximity of the concept and the brand. If you enter the correlation value of the brand fit on one axis of a chart and the willingness to buy a product on the other axis, you can compare and evaluate the different concepts (Exhibit 1). Once the product has been launched, the actual sales can be added as a third dimension. Over time, this produces a model that the project manager can use to infer implications for other product developments.

pan – repeating it periodically ensures that all involved internalize the rules and that a learning curve emerges. The steps in the process must have a simple structure and be easy to understand. Particularly in high-tech sectors like telecommunications or insurance, processes are often excessively complex and are not put into practice for this reason. Product development needs someone with overall responsibility. This person must be a senior manager so that the product development process receives due attention from top management for relevant decisions. Too much do-it-yourself can be harmful. When developing the ideas, the group benefits from the stimulus of a professional external moderator who not only knows how to manage the creative process but can also add value by providing input on content. External experts who are capable of delivering new ideas and perspectives for the different steps in the development process over and over again may equally be helpful. The process described only fully blossoms if all roles and responsibilities are similarly reflected in the overall organization. Clear competencies, especially between

Requirements and rules of customer-focused product development
No matter how clear the process essentially is, its success is determined by the level of detail. Practical experience shows that a lot of conditions have to be satisfied if the five steps described are to produce not just a one-off project but rather a continuous flow of new, successful products as part of the corporate culture. No matter how banal the factors may seem, they are often not implemented systematically enough: The systematic product development process has to take place regularly if it is to avoid being just a flash in the

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Opportunities in Over-the-Top Applications: Winning Mobile Instant Messaging Strategies
While mobile instant messaging (IM) has been embraced as an important extension of the widely used desktop application, it also provides a potential umbrella for a number of other mobile services, including video, content, and even voice. IM services on the desktop today form one of the largest communications networks worldwide. They are especially popular with younger consumers, who also make the most use of mobile SMS. There is clear evidence that many users of fixed IM would also value a mobile version of the service, although much of this demand has been nurtured by “over-the-top” Internet players offering services that are free at the margin to the user, leaving telcos behind. Unfortunately, this could cannibalize a large proportion of the mobile industry’s profits as these over-the-top mobile applications compete with traditional services (e.g., IM with SMS, mobile VoIP with voice). While the risks associated with mobile IM are real, it could provide operators with a new revenue opportunity if developed and managed carefully. Internet players will welcome new business models that allow them to monetize their IM traffic more effectively and to charge a “mobility premium” for mobile instant messaging. Mobile operators can benefit strongly from alliances and by creating interoperability with existing online players as well as with other mobile operators. The choice of whether to partner with online players or whom to partner with should differ by region or country depending on the local situation. Seeking interoperability with other IM players lowers the risk for all parties. Operators need to answer two questions. First, what is the likely consumer demand for IM – from niche application to mass market? And secondly, how should they address this demand – from defending against it, to introducing proprietary solutions, to developing full partnerships with the Internet players? We have identified a number of key steps to implement IM, with interoperability as a key element. These steps include partnership decisions; technology and service decisions; handset deployment; and the marketing and product development cycle. Mobile instant messaging presents both a challenge and an opportunity for operators. Players that act quickly and cultivate Internet partners and interoperability will benefit the most. Those pursuing over-defensive or closed solutions will face diminished returns. This article is an excerpt published originally in McKinsey’s Telecoms Extranet (http://telecoms. mckinsey.com). By Nuno Goncalves Pedro, Bernhard Schmidt, and Michael Wilshire

product management and marketing functions, are a key success factor. Companies that are still making the transition from a product focus to a strong customer focus should take particular care that the reinforcement of marketing functions is accompanied by a corresponding revaluation of the product management role. Control logic that reflects the areas of responsibility (e.g., income statement, cost, number of customers, time-to-market) of everyone involved in the product development process is also indispensable for an

efficient, effective product development process. The customer focus can then be quantified on the basis of parameters like customer value. Last but not least, the success of the product development process depends on how intensively (and how visibly) top management is involved in the product development process and supports its focus on customer needs. This may result in processes and structures having to be reconfigured to focus more squarely on customers’ needs.

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*** The idea of customer-focused product development is not a new one, but its success depends on what the enterprise makes of it: as in a host of other areas, implementation is decisive. Companies that manage to implement their product development in recurrent, systematic processes have a good chance of mastering the dual challenge of efficiency and effectiveness. Developing new products rapidly and cost-effectively can be the all-important step forward, especially in international competition. If, when doing this, large, complex organizations also manage to combine the systematic approach with the basic idea behind the visionary approach – even just a little bit – they may have discovered the key to success. By Claudia Bünte and Haiko van Lengen

RECALL No 3 – Innovation@Scale Moving Beyond

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04 Moving Beyond

Part 2 “Making the Unreal Real” examined the impact virtualization has had on the telecoms industry, described the future strategic imperatives for telcos, and revealed how incumbents can act to shield and expand their current positions in the industry. This article will explore ways to capture new business opportunities in three specific areas: the mobile Internet (mobile TV/search and commerce), Internet protocol television (IPTV), and digital storage (Exhibit 1). The telecoms industry rightly views virtualization as one of the driving forces behind the successive waves of growth that participants have enjoyed over the past 150 years. Clearly, virtualization creates discontinuitydriven profitable growth opportunities on a regular basis, and the expected explosion in bandwidth should multiply them significantly over the next several years.

bandwidth, storage capacity of mobile handsets has long been a bottleneck. Today, however, as storage capacity expands, new multimedia capabilities increase, as does the ability to store a larger collection of media in small devices. Moreover, mobile screens continue to get better in terms of resolution and quality, enabling new applications and improved user experience, while software and processing power both also keep improving, boosting usability. In addition, device availability has increased due to the proliferation of SIM cards, which Web-enable new devices such as MP3 players (this trend heightens the need for telcos to defend themselves against device manufacturer attempts to capture new sources of traffic and valueadded service revenue). While all these factors support the rapid development of the mobile Internet, battery life remains one big potential bottleneck because it hasn’t improved at the same pace as other key technologies. In order to further elaborate on the opportunities of the mobile Internet, the following pages will concentrate on two of the biggest opportunities within mobile Internet applications: mobile TV and mobile search.

Mobile Internet: Broadband unbound?
A number of technical barriers have thus far impeded the rollout of mobile Internet service, but the industry continues to make progress in overcoming them. In particular, the mobile bandwidth bottleneck keeps fading, enabling new mobile applications that provide improved user experience. Apple’s iPhone, for example, represents the most recent step forward, offering several mobile Internet applications – ranging from iTunes to Internet navigation of a quality that would have been unthinkable in the past. And, while the gap to fixed band-width remains, mobile service can handle increasingly advanced applications and services, which in concert with tariff reductions, have allowed data traffic to increase. Besides mobile

Mobile television: A waiting solution?
Mobile TV typically offers a number of paid and free channels via a mobile handset, with customers expected to use it primarily during waiting periods or while commuting. Besides offering an additional revenue stream, mobile TV provides the incumbent with an interesting possibility to enhance the attractiveness of its mobile offers in a highly competitive environment and hence, shield its existing customer base while gaining new subscribers.

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Key topics for telcos

A workable mobile TV business model might include a flat subscription rate for a set number of channels and provide ways to capture a share of anticipated advertising revenue. Mobile operators need to cooperate with content owners, aggregators, and channels to make this model work. The mobile TV market in western Europe is expected to grow at nearly 110 percent annually from 2006, reaching EUR 5.1 billion in 2010. Possible threats to this growth include mobile data substitutes that crowd TV out of the market or increased take-up in “carry-on” TV devices (e.g., video-ready iPods or Sony’s PSP). To make mobile TV a success, telcos must address questions across three dimensions: market/consumer demand; technology; and the business model (Exhibit 2). Each of these dimensions will be examined further. A) Market/consumer demand. A number of market discontinuities will affect opportunities in mobile TV. Several will center on the need to build better networks and devices – namely, the rollout of high-speed mobile networks, the fact that mobile devices will soon begin to approach today’s personal computer capabilities, and the proliferation of WiFi networks. A second set of trends surrounds evolving consumer behavior, including the increasing amounts of time people spend using entertainment services and the rapid growth of new applications beyond voice and simple data, such as location

services, video mail, and social networking. Yet another group of trends centers on increased competition. Together, these trends signal new opportunities for applications and mobile community services, the need to approach integrated wireless/wireline players in an integrated manner, and the fact that industry players must act now, since time is running out. In order to succeed in this increasingly competitive environment, McKinsey & Company’s analyses have shown that companies must tackle unique barriers to adoption in different markets. In Germany, for example, consumer surveys reveal that price, quality, and navigation capabilities emerge as the main barriers to adoption. Lower prices are the top priority for all user groups, regardless of technology or customer age. McKinsey also learned that 3G users and youngersegment customers value high sound quality and faster download speeds, and that easy navigation is important to non-3G users and people over 30. B) Technology. Mobile TV can be delivered via three different technologies. First, network-based 3G/4G unicast is suitable for short (and longer) streamed video clips or for live TV delivered via the wireless broadband network. Bandwidth availability remains the limiting factor, since downloading complete movies still

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02

To create a mobile TV success case, telcos must answer questions along three dimensions

requires too much time. The two other technologies are broadcast (i.e., mobile network-independent), which is gaining momentum in Asia and doesn’t rely upon the mobile bandwidth; and “cache & carry” (i.e., video clips that are downloaded to a PC first and then transferred to a mobile device, such as a mobile phone or an iPod), which is certainly the least sophisticated technology, but is gaining popularity due to the significant increase in podcasts. C) Business model. Operators leverage mobile video for multiple purposes. Broadband video can increase ARPU, for instance: one operator is already seeing S-DMB (satellite digital multimedia broadcasting) watching times of nearly 60 minutes per day. Operators can also leverage mobile TV to encourage churn-in (i.e., attracting customers from other mobile players/ incumbents), with attackers in South Korea, for example, planning to offer free TV to churn in subscribers from incumbents. Yet a third use concentrates on providing a platform for new services, with operators in Japan, for example, developing next-generation interactive services via mobile video, including shopping and polling. Two competing mobile TV revenue models have coalesced: subscription- and ad revenue-driven. In the subscription model, users might pay a monthly fee

for general content and an additional fee for premium programming or receive general content for free with a monthly fee for premium service. Advertising-enabled plays include advertising-supported free-to-air (FTA) TV broadcasting or the offer of limited advertising on subscription-based TV (although audience reaction must be tested in the latter case). Subscribers typically perceive mobile TV advertising differently from traditional TV ads, due to length (e.g., 15-second spots instead of 30) and lower run frequencies (e.g., 10 instead of 20 per hour) due to the different viewing experience. Because of these differences, mobile TV CPM (advertising cost per thousand viewers) might be lower than with the traditional experience. The interests of other stakeholders will likely make it difficult for operators to make money in the mobile music and video businesses. Content providers, for example, seek a high share of content revenue and price, thus limiting consumer choice via proprietary DRM (digital rights management). Customers appear unwilling to pay significant premiums for traffic-based “instant gratification,” and older subscribers are often unable to use current features due to interface difficulties. In addition, equipment manufacturers are increasingly offering network-independent solutions using competing platforms (e.g., Apple iPod, Yahoo! Music).

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Overall, several hurdles must be overcome before mobile TV can become widespread. These include issues such as which technology will be adopted, who will invest into mobile TV while demand is limited, can the advertising model work, and – most importantly – is there enough customer demand?

2. Telcos must develop proprietary content and functionality to differentiate themselves from pure aggregators. They can secure broad and deep editorial capabilities and user-generated content (i.e., innovative features/ functionality) through partnerships. 3. Telcos also need a way to drive traffic to local sites, such as existing brand power, distribution deals, or strong consumer awareness of products and services. 4. Finally, establishing relationships with local advertisers covering nearly all market verticals in most geographic markets will be important because small businesses are underrepresented in online advertising and significant upside potential exists for the player that cracks this market. Besides offering significant opportunities, operators should also be aware of the significant threats linked to these applications. Mobile search and commerce could become a “Trojan horse” on operator handsets if mobile players don’t act now to provide best-of-breed search functionality. Third parties, such as Google and Yahoo!, for example, could maneuver onto handsets with superb search applications and ultimately, disintermediate mobile operators. They could begin to bundle search functions with a suite of applications, possibly including instant messaging, e-mail, maps, and other features. Google and Yahoo! could further upgrade the application suite to include “verticals” with high monetization potential (e.g., ring tones, video, music, local services, etc.). If this happens, operators will lose the ability to capture a share of the revenue generated by content sales to their subscribers. Google Local, the company’s current mobile search product, closely interacts with Google’s global site, relying upon mapping features to generate traffic and serve users. In providing maps over the user’s mobile handset that reveal requested points of interest (e.g., restaurants, entertainment options), some observers believe Google Local to be the first phase of an ambitious plan to deploy large-scale, WiFi-enhanced location-based services, including localized ad targeting.

Search and commerce: Locating growth?
McKinsey expects mobile search and commerce revenue to grow at nearly 75 percent annually between 2006 and 2010, reaching EUR 1.4 billion in western Europe. Strategically, the incumbent rationale for mobile search and commerce centers on seizing an emerging revenue opportunity in the mobile market. It’s clear that telcos can rightfully assume natural ownership of mobile search and commerce, due to their unique assets. These include having controlled access via handsets and the applications installed on them and “owning” existing customer relationships. Furthermore, mobile operators possess unique localization capabilities and can locate customers using triangulation and cellidentification techniques. Western Europe already benefits from localization service and the United States is evolving towards it with the rollout of handset GPS enablement. Operators should thus be able to leverage emerging customer demand for mobile search and commerce. Three basic types of mobile search and commerce exist. The first – stand-alone search capability – focuses on locating specific places or things (e.g., a nearby drugstore while shopping) and utilizes localized search and mapping/ navigation systems. Mobile commerce enables the user to access online shopping opportunities “on the go.” Finally, search and commerce combines the above two capabilities to offer extended services (e.g., being able to compare pricing on plasma TVs while in a consumer electronics store). Already, major online players are investing to provide mobile search capabilities, with an emphasis on location-based services. McKinsey has identified four key mobile search and commerce success criteria: 1. As local search engines become increasingly important aggregators of local content and functionality, telcos must develop the ability to skillfully leverage a small number of appropriate local data sources (e.g., Yellow Pages, directories).

IPTV: Online/onscreen
The market for Internet protocol television (IPTV) in western Europe should grow strongly in terms of both revenue and subscribers over the next several years and is expected to reach EUR 2.7 billion in 2010 from just under EUR 300 million in 2006.

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03

4 dimensions create a successful case for IPTV providers

While such growth is attractive, access shielding provides the key strategic rationale for IPTV for fixed-line incumbents. In the current highly competitive environment, fixed-line incumbents must increasingly focus on retaining and winning back customers by offering additional services – specifically, IPTV. The future of IPTV will be shaped by several core trends. First, customers are shifting away from traditional media platforms and increasingly attempting to take control of time and place. Growth will likely emerge at the two ends of the content spectrum, defined by user-generated content at one end and by highly specialized programs customized for a specific audience at the other, with new value players threatening the incumbent business model. Media options that offer advertisers “proof of return” will continue to displace ad spend from traditional, mass-reach vehicles. Serving “the long tail” will become attractive and “semi-niches” will be very important for boosting revenue. The TV market is encountering a generational divide, with younger audiences preferring new sources and forms of media consumption. User-generated content is becoming more important, and the choice of occasion is becoming more relevant to media consumption.

IPTV providers should strategically develop their offerings around four dimensions (Exhibit 3): Leverage access to the living room (gateway). Telcos should aspire to equip the home with Internet, phone, entertainment, and home automation applications, ultimately leading to the “connected home” of the future. Capture opportunities in innovative advertising. With IPTV, advertising euro can be spent with high impact on a much more targeted audience than any traditional media allows. Approaches include personalizing advertising messages and offering interactive advertising and product information. Leverage Webspace. Options include creating a unique offer in Web TV and managing the convergence of Web TV and IPTV. Leverage possibilities innate in high-speed access and the graphic user interface (GUI). Operators should use the GUI to win new target groups for the Internet (e.g., older people who have trouble accessing services) and leverage high-speed access to attract heavy users.

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Opportunities in Video: Video Moves to the “Third Screen”
As mobile video applications adopt different wireless delivery systems, they will transform the way that people watch videos. Moving away from an experience tied to a fixed screen shared communally by several people to one based upon an intimate relationship with a personalized device that will go wherever and show whatever an individual chooses to go and see. Currently, the market for mobile video worldwide is relatively small, but trends point towards a promising future. Primary market research, together with mobile video pilot studies, point to significant emerging consumer demand as well as a hunger for mobile TV that could transform the third screen into a mass-market phenomenon. Consumer surveys in the UK, Sweden, and Finland suggest that more than 75 percent of the population is interested in the concept of mobile video. If services are correctly priced, if handsets are affordable, and if attractive programming is made available (all big assumptions, granted), then a minimum of 45 percent of mobile and/or personal organizer users could become mobile TV subscribers in less than 10 years. However, as they consider this opportunity, many companies are too narrowly focused on the battle for technology standards. A raging debate is taking place today regarding the technology linked to mobile video. Terms such as S-DMB, MediaFLO, DVB-H, MMBS, TD-tv, and HSDPA are common, and it may seem as if the battle for technology is the core issue for mobile video. In the end, the precise technology and even the way in which the value chain develops are less important than building a service that consumers really want. This means providing compelling programming re-imagined for the very small screen and for the way people want to use it: on the way to work, waiting for a flight, or just killing time. A McKinsey survey of more than 1,000 European mobile phone subscribers shows the clear-cut elements of the value proposition to the user. The key elements are: sufficient reach; a balanced mix of on-demand and broadcast; a high-quality offering in content and image picturing; an acceptance of contextual advertising; and some interactive services, such as video search, access to video TV guide, and participatory TV. Third screen users really seek a mix of live TV and downloads. Finally, this must be done at a price point that reflects mobility and personalization of the device. Although some trials involved tariffs of EUR 15 per month, offering subscriptions with an access price closer to EUR 5 per month would double the expected rate of market penetration. In the long term, it is likely to create a much larger market in reach and revenue. As in many digital markets, the key will be to create a business model that allows the industry to reach critical mass. Until that point, no player will be profitable. Given the high externalities – compounded by network effects – profitability will develop exponentially. This article is an excerpt published originally in McKinsey’s Digital Content and Services brochure, 2007. By Jacques Bughin and Daniel Pacthod

Digital storage: Total online recall
Digital storage has yet to take off in the consumer market, although companies have been marketing the concept for some time. As a result, today, there are quite a few small Web storage providers chasing a limited, highly fragmented market. Because of security and trust issues, small Web storage providers will find it

difficult to attract a large user base, and the offerings of the only major player in the market remain highly limited. Access to Web storage from mobile devices could drive usage, but to date, there has been little integration with mobile applications. Overall, the current limitations of mobile bandwidth make accessing large files cumbersome, and most mobile handsets lack word processing and videostreaming applications.

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*** However, the digital storage game might be on the cusp of significant change, as major online players move to enter the market. Google, for example, is reportedly exploring the possibilities of offering limitless digital storage. Company representatives envision housing all user files, including e-mails, pictures, bookmarks, etc. and making them accessible from anywhere (i.e., any device, any platform). In addition, Amazon launched S3, a new Web storage service, in March 2006. Currently aimed at developers and enterprises, customers pay 15 cents per gigabyte for storage, which is lower than current standard rates.

As telecoms industry virtualization advances, driven by continual increases in network bandwidth, the competitive pressures facing industry participants will inexorably grow. Players – both new and old – need innovative ways to stimulate the profitable growth needed to sustain them over the longer term. McKinsey is confident that incumbents can leverage the ideas presented here to capture value by participating more fully in the mobile Internet, IPTV, and digital storage markets. By Jens-Olaf Berwig, Fabian Billing, Jan-Christoph Köstring, Christian Kraus, and Boris Maurer

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05 Making Giants Move

This part demonstrates the pivotal role a corporate business development unit can play in nurturing disruptive innovations. The telecoms industry rightly sees growth as an imperative, but unmanaged growth can quickly get out of hand, especially when it involves disruptive innovations. Instead, managers need a way to cultivate growth – one that enables them to prune back unfocused initiatives and concentrate on profitable plans. Initially, we examined the impact that virtualization¹ has had on the telecoms industry and then explored ways to capture new business opportunities. This article focuses on setting up a corporate business development (CBD) unit as a way to enable Innovation@Scale. Experience shows that the process and organizational structure employed to achieve profitable growth must fit the nature of the opportunity. For example, a strong telecoms incumbent will likely focus on innovation opportunities that fit its current business model well, employing innovation-focused staff as either specialized or functional teams within the existing organization. Experienced new business builders, on the other hand, might easily opt for disruptive innovation plays and site innovation employees in a separate, fully autonomous organization (or one that perhaps shares back-office functions with the parent business), which would include clear business leadership, adequate financing, and a business plan based upon external milestones. In each case, the organizational structure chosen should be set up to enhance and support the innovation play in the context of the main business focus and culture.

It is often found that telecoms companies pursue “one size fits all” innovation processes that discriminate against “non-incremental” ideas. One European telecoms player, for example, made sure that idea generation and concept development were undertaken by the innovation management business unit, but then handed off the responsibility for commercialization to the strategic business units (SBUs). The SBUs tended to favor incremental projects over non-incremental (i.e., innovation-focused) schemes due to short-term earning pressure and the lack of incentives to push non-incremental ideas. In this case, the telco didn’t consider the specific requirements of innovative programs and hence, systematically discriminated against them. The core reason for this discrimination resides in the fact that Innovation@Scale differs fundamentally from the task of running the current business across four crucial dimensions (Exhibit 1): 1. Speed to scale. Fundamental innovations (such as starting the mobile arm of an integrated telco 10 to 15 years ago) will likely eat into a telco’s core business at some point – perhaps even right away. Innovation@ Scale needs the fundamental freedom to scale up the new venture rigorously, independent of short-term budget constraints or possible cannibalization effects on the core business. As long as the board of management approves the fundamental business logic, the venture should be allowed to go ahead without realignment in the core business. 2. Leadership and risk taking. While a running business needs effective line management to oversee processes

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Key elements of Innovation@Scale business models

and “bring people on board,” non-incremental Innovation @Scale requires individual risk taking and a willingness to break with the conventions of the core business. 3. Financing and steering logic. Core business short-term budgets and prioritization decisions usually find “better” uses for incremental spending than investments into innovative projects that carry uncertain future returns. Even if the leader of an Innovation@Scale project initially convinces management of the virtues of the undertaking, regular budget revisions will likely not align with external milestones, thus leading to continual project cuts. 4. Shaping the environment. Innovation@Scale projects must often create a new ecosystem of partners that are independent of the core business and make credible commitments to them. This process becomes much more difficult if the project risks overriding core business priorities. Instead of taking this type of one-size-fits-all approach, we recommend that incumbents adopt a new organizational approach, namely, the introduction of a CBD unit.

A CBD unit offers telecoms incumbents a number of significant advantages over the traditional practice of integrating innovation programs into the core business. There are five potential roles that a CBD unit fulfills (Exhibit 2). It can serve as a robust idea generator for the innovation portfolio or as an internal venture capital unit, funding investments into new businesses. A CBD unit can also fulfill the role of entrepreneur within an organization to commercialize new businesses; become a facilitator that provides support in business building; or act as a partner manager by taking ownership of relationships with key external partners for business development ideas. The role played by the CBD unit will differ depending upon the type of business under consideration. For a radically new strategic business, for example, the CBD unit acts in its venture capital, entrepreneur, facilitator, and partner manager roles, while it typically plays two main roles when nurturing a new tactical business: venture capital provider and partner manager. In fact, McKinsey notes that for Innovation@Scale, new business development can be addressed either at a CBD unit or BU level, depending upon the type of opportunity. For example, a CBD unit should address disruptive business openings, while specific BUs should handle incremental opportunities and initiatives. However, to make

What a corporate business development unit delivers

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5 potential roles for a corporate business development unit

this division of responsibility work, managers need to be able to answer two questions: Is the new business disruptive (i.e., a discontinuity) or merely an opportunity and/or an initiative? Regarding the non-disruptive portfolio of opportunities and initiatives, how do we obtain a holistic perspective on all such projects?

The opportunity should also require a separation from the company’s core business due to a mismatch of mid-term focus and short-term planning. A radical new go-to-market model. In this case, the existing business-to-business sales force may not be required to approach most relevant customers or stakeholders; and at the business-to-consumer level, leveraging the company’s existing customer base would not be essential. A new value-creation model. The opportunity is part of a newly emerging value-creation model that might cannibalize existing business in the long run. Consequently, the BUs likely won’t invest into such an opportunity, opening the door to CBD unit participation. Substantial platform investment. The opportunity requires substantial investment into a technology platform. A CBD unit would be better positioned to oversee such spending because large upfront investments would transcend the funding and investment processes of the BUs, as would the likely uncertain returns in the long term. An opportunity outside of BU focus. The opportunity lies outside the strategic focus of the SBU (e.g., in terms of geographic focus) and thus, the SBU is unlikely

1. Assessing a disruptive business opportunity
McKinsey has identified the six characteristics of the type of disruptive business that can benefit from a CBD unit. Managers can use them to perform a detailed evaluation of new businesses. Specifically, such an opportunity will exhibit: Significant revenue potential. An attractive discontinuity should be large enough to have a significant revenue impact on the corporation (e.g., > EUR 500 million within the next four years). Discontinuity. The opportunity, characterized by a sharp risk profile and the need for central decision making, should involve a new mass-market business, requiring quick ramp-up and significant resources or investments.

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to invest into such opportunities. However, the geographic footprint might be highly relevant from a corporate perspective.

2. Assessing the portfolio of new opportunities and initiatives
A telco should differentiate its portfolio of non-disruptive new opportunities and initiatives at the business unit level, primarily based upon expected revenue (the first characteristic noted above, with the other five criteria serving to amplify the revenue outcome). If the new business has revenue potential that exceeds EUR 500 million over four years and scores high on at least one other criterion, the initiative should likely be under the direct responsibility of the top executive in the appropriate strategic business unit. Opportunities and initiatives managed within a BU typically fall into four categories – new business creation, the adaptation of core markets, earnings growth activties, and productivity improvement. Of these, the first two should be handled in a portfolio of initiatives. Managing a variety of new business initiatives within the business units requires managers to adopt a systematic approach to portfolio management – one that has two major dimensions. The first deals with risk and timing. Managers need to know whether the portfolio contains the right mix of risk, whether it’s balanced across the stages of the innovation process and whether there are projected timing gaps. The second concerns the fit with the business unit’s overall innovation strategy. Does the portfolio fit with other initiatives and fields of research; are there “white spots” (i.e., untapped plays) in the innovation landscape; and are there enough new ideas in the initiative pipeline? Active management of the new business portfolio can ensure that the company’s overall initiatives are balanced across business lines, innovation search fields, and markets. In addition, by positioning initiatives in the portfolio in terms of the varying degrees of risk and the amount of time each requires, managers can identify issues in the initiative program before they become “play breakers.” Otherwise, the portfolio might suffer from having an overly short-term focus, be too risky or risk-averse, or lack enough “low-hanging fruit” to build momentum.

regarding operating principles and roles, the organizational structure and human resources planning, and funding and financial control. This section also provides a glimpse of best-practice results in setting up a CBD unit from a number of industries. Principles and roles. An effective CBD unit needs strong operating principles and clear-cut roles. McKinsey has identified five CBD unit principles: funding; investment process; talent and skills; entrepreneurship; and “speed to scale.” First, the CBD unit needs structured venture funding to overcome any tendencies to pursue a short-term planning process focus and to enable development of new businesses or opportunities with significant potential. Next, telcos should implement a systematic investment process to ensure internal funding and develop an efficient decision making process controlled by the CBD unit (with no intervention from other business units). The third principle involves talent and skills. In this case, the CBD unit will require the quick ramp-up of critical skills, as well as access to customers and technologies. One potentially useful approach in this case involves focused and small competency-based acquisitions. Fourth, managers need to drive the setup and growth of new businesses by ensuring full end-to-end entrepreneurial responsibility. The final principle involves speeding up time-to-market for new businesses, which might otherwise get stuck in cross- or internal-SBU responsibility battles. For the highest impact, the task assigned to a new CBD unit must be aligned with a telco’s current innovation strategy and innovation management process. The innovation strategy will likely involve defining which business fields to pursue over the next five years, coordinating cross-BU convergence topics and moderating issues that arise among BUs. Innovation management duties include transferring R&D results into the BUs and driving ideas until the pilot or prototyping phase. Organization and human resources principles. Ultimately, the CBD unit will be responsible for the setup and growth of new disruptive businesses, including full “end-to-end” entrepreneurial responsibility. A typical CBD unit would include a team of about five people with three to six years of experience in management consulting or private equity (or be comprised of internal high-potential employees). They should have proven capabilities in functional areas (e.g., specialists in marketing, finance, deal structuring, service operations, or specific industries). Ideally, they should be equipped

Setting up a corporate business development unit
Establishing a corporate business development unit requires telcos to make a broad array of decisions

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Implementing best practice at telco incumbents must take into account company-specific obstacles

with industry know-how in one of the selected business areas, as well as elaborate technical knowledge. A CBD unit should also include a strategic alliances team of about four people with three to six years of experience in the management of strategic alliances and partnerships at the global industry level. Other employees include the CBD unit leader and an “entrepreneur” who has more than ten years of management experience in a relevant industry and a solid entrepreneurial background. Funding and financial control. The CBD unit requires its own funding and financial control mechanisms, which can be managed via the use of “soft gates” that allow managers to deal effectively with the uncertainty that naturally surrounds disruptive innovations. An initial soft gate might focus on whether the idea is “big” enough for consideration. Evaluation criteria could include whether the innovation is consistent with the company’s strategic priorities, meets size requirements, and is a potentially disruptive innovation (e.g., is outside the current market and/or business model). Once an innovation receives this initial soft gate go-ahead, it enters the concept development process, with appropriate funding and other resources. Similar soft gates should be employed during the concept development and commercialization stages.

Funding guidelines need to address issues such as timing (e.g., how often should funds be paid out?); governance (e.g., who approves the overall funding for CBD projects?); and one-time investments (e.g., how should large one-time investments be treated?). They also need to take into account CBD unit exit strategies (e.g., how much should the SBUs pay the CBD unit for projects at the handover point?) and the CBD funding process versus that used in the BUs (e.g., should it be different?). CBD best practices. McKinsey research into the corporate business development units deployed in a variety of industries highlights best-practice approaches that span five dimensions: funding, leadership, governance, talent, and organization. For example, in terms of funding, best-practice companies devise ways to dedicate and protect investments for strategic and breakthrough initiatives despite external pressures to deliver short-term earnings. Regarding governance, no single “right way” exists, but all successful companies do three things well: they clearly define roles and responsibilities; they implement separate processes for strategic and breakthrough innovations; and they engineer the right organizational reporting flows (typically directly to the CEO for discontinuities).

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Opportunities in Mobile Search: The On-Ramp to Mobile Advertising
Beyond online ads, the next frontier of digital marketing – mobile advertising – is coming of age and set to have a major impact, for a number of reasons. No digital device is as ubiquitous as the mobile phone. Among the various forms of mobile advertising, mobile search stands out as the best jumping-off point for capturing the broader opportunity. First, the small screens of mobile devices, which severely limit the effectiveness of display ads, are friendly to the text-based format of search results. Second, consumer research shows that people value tools that make it easier for them to find content and information using a mobile handset. The potential audience for mobile advertising is massive, by 2013, mobile search revenue could exceed USD 28 billion globally. Search also has a significant impact on content sales (e.g., ring tones, wallpaper), which will reach USD 10 billion over the next five years in the United States and Europe alone. Wireless carriers today exercise a lot of control over the handset and the user experience, but the status quo may be changing. Handset manufacturers are embedding applications that run over the top of the operator’s network, thus bypassing the operator’s search offering entirely. So how should a carrier (or any other player) formulate its mobile search strategy? How can it maximize revenue and profit potential, while ensuring that it maintains relevance in a fiercely competitive, quickly evolving industry? McKinsey & Company recommends an approach that allows players to make discrete decisions about each element of the mobile search value chain, thereby increasing the strategic freedom to capture the largest possible share of the opportunity. A player can map out its options by disaggregating the mobile search value chain along two dimensions: type of search (e.g., mobile storefront search, local search, vertical search, or horizontal search) and component in the search process (e.g., initiating the search, conducting the search, displaying the results, and monetizing the results). For each element, it can decide whether to go it alone or partner with other players and how to brand its search offering. Clearly, this approach needs to be market specific. Regional differences, again, will inform the optimal decision. Despite current volumes being too small to attract serious interest from advertisers, players in the mobile arena must take a forward-looking perspective on mobile search, or else risk being relegated to a marginal role in this enormously high-potential category. These are early days, and companies that act quickly and intelligently can set standards and gain access to related revenue flows. They should therefore give mobile search a place on the CEO agenda. This article is an excerpt published originally in McKinsey’s Digital Content and Services brochure, 2007. By Jacques Bughin, Dylan Henryson, Parviz Parvizi, Yael Taqqu, Jon Wilkins, and Michael Wilshire

While such findings can be generally helpful, telco incumbents often face company-specific obstacles that must be taken into account (Exhibit 3). For example, unifying a CBD unit at the corporate level could mean cutting into the spheres of responsibility of SBU leaders. SBU leaders may also be incentivized against supporting corporate-level projects, and some CBD projects could cannibalize existing businesses, causing concerns within the SBUs. Overall, telecoms industry players must contend with short-term earnings pressure

and the twin needs to balance new incremental versus breakthrough businesses and to attract talent for new business development. *** A corporate business development unit can provide managers with a way to overcome the typically shortterm focus and incrementalist nature of the line business in order to capture the often massive value resident

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in disruptive innovations. This overview is meant to provide telco managers with an approach for setting up and running a CBD unit that promotes innovation while effectively managing risk. By Jens-Olaf Berwig, Fabian Billing, Jan-Christoph Köstring, Christian Kraus, and Boris Maurer

¹ “Virtualization” is defined as making objects and actions available independent of location and/or time – in effect, transforming them from a physical form to a virtual, non-physical form. McKinsey & Company’s research shows that increasing bandwidth drives telecoms virtualization.

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06 Cracking the Code –

Benchmarking Results

Forget about wild ideas and rigid processes – these insights from a global innovation benchmarking survey by McKinsey & Company show what it really takes to effectively Innovate@Scale. Celebrated as a true source of sustainable competitive advantage, successful innovations exude an almost mystical aura. McKinsey’s innovation benchmarking survey¹ shows why: strong innovators grow 13 percentage points more quickly than competitors and outearn them by 3 full percentage points. But 94 percent of all surveyed companies professed less than complete satisfaction with their innovation rates, and the survey results “debunked” some long-held innovation myths. It was learned, for example, that generating ideas alone won’t drive innovation, nor will simply setting up an innovation process. Instead, the research shows there are many elements that must simultaneously mesh completely with each other in order to generate true innovation “horsepower.”

A focus of this survey centered on what McKinsey characterizes as “Innovation@Scale,” which involves building new scalable platforms capable of discontinuous economic value creation. Driven by new products, services, processes, or business models that break fundamental orthodoxies regarding ways of working, Innovation@Scale delivers value that is sustainable and financially meaningful to a major corporation or institution. More than 800 managers participated in this global benchmarking survey, the objective of which was to understand how successful companies differentiate themselves from the rest and how they Innovate@Scale. The team clustered and analyzed the survey findings to identify high- and low-performing companies (Exhibit 1). It was assumed that innovation excellence would positively correlate with financial success and the top 25 percent were defined as high performers and the bottom quarter as low performers. The high performers achieved sales growth that, on average, was 24 percentage points above the broader market and EBIT (earnings before interest and taxes) that were 9 percentage points higher, while low performers saw sales 9 percentage points below the market and EBIT 6 percentage points lower.

Generating real innovation horsepower
McKinsey’s research shows that these elements have a fairly complex set of blueprints – innovation is clearly not a sequential process. It begins with aspirations, which fuel strategic decisions regarding portfolio management, idea generation, concept development, and product rollout. Market insights are required to guide decisions, to tie in relevant aspects of innovationfocused partner networks, and to drive the entire company via an optimized organization under the guidance of a strong leadership cadre.

Survey highlights
A company’s satisfaction with its innovation rates and economic performance tends to correlate strongly with its overall scores across the elements of innovation. In other words, satisfied innovators tend to generate above-average sales growth and EBIT performance and can back up their feelings of satisfaction with cold,

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Participants and methodology of the Innovation Benchmarking Survey

hard performance data. Furthermore, this linear relationship extends downward to the least-satisfied companies, whose financial results and performance in terms of the innovation elements are likewise waning. The research revealed three steps that companies typically take to achieve high levels of innovation performance: get the basics right; make sure all innovation elements are up and running; and address “last frontier” issues that even high performers need to resolve. Each step will be examined in greater detail. A. Getting the basics right. Basic innovation management measures, such as employing cross-functional teams, nurturing strong idea-generation capabilities, developing a fully transparent stage-gate process, and cultivating robust networks of external partners, must be solidly in place. However, these steps don’t by themselves differentiate high-performing innovators from the rest of the pack. B. Getting all elements up to speed. Successful companies have cracked the code regarding Innovation@Scale, which means they excel at all elements individually and manage them consistently and seamlessly.

1) The survey shows that high-performing companies set clear and challenging aspirations. They have formulated and quantified their innovation aspirations, which are always very aggressive “stretch” goals. Companies such as Rubbermaid, DuPont, and 3M, for example, aspire to have a certain percentage of their sales revenue come from products introduced in the last five years. For telcos, success very often involves closing the gap between revenue growth aspirations and declining market prospects (e.g., price erosion or intensified competition). However, markets can only digest a limited number of innovations at a given time if they are to perceive them as distinctive. Thus, management needs to prioritize “a few big bets” and put forth a bold penetration marketing campaign to achieve its goals. 2) Best-practice innovators have well thought-out innovation strategies for reaching their goals, and the challenge doesn’t stop at simply defining the right opportunities. An innovation strategy should take into account an organization’s capabilities to pursue the defined, attractive opportunities. It should explicitly state whether the capabilities are available within the organization, whether they can be built up, or whether partners with complementary capabilities should be leveraged. And the third element of the innovation strategy requires managers to define the competitive role (i.e.,

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Applying the wheel to telecoms reveals the relevant opportunity space

innovation leader or fast follower). By covering all three dimensions, successful innovators can make sure they pursue opportunities with which they can be successful. The survey results show that telcos face significant challenges in this area: Many telco organizations lack the capabilities needed to manage large-scale non-incremental innovation programs or projects, although they do manage shortterm-focused product line extensions well. The industry has a strong “do-it-ourselves” mentality and therefore, often fails to leverage external partners and relationships for innovations. Companies don’t pursue a rigorous approach to focus the innovation portfolio on a few big bets. Furthermore, the medium-term perspective (i.e., one to five years) frequently lacks an appropriate “owner” within telcos, which instead, tend to apply identical processes and organizational approaches to execute both incremental and non-incremental innovations. Telcos often fail to generate promising non-incremental innovation opportunities proactively, instead relying

upon vendors to come up with such proposals. Because of this, they frequently overemphasize technologically focused ideas, disregarding the benefits resident in the unique insights they may have concerning customers and/or industry conduct. 3) Innovators utilize all three sources of innovation – namely, customer insights, technologies, and industry conduct – to generate ideas. Both low and high performers concentrate on technology advances and breakthroughs, but high performers go two steps further, investing more to gain solid customer insights and experimenting to a greater extent with new business models and ways to steer industry conduct to their advantage (e.g., learning from competitor business systems, value chains, and the regulatory environment). Leveraging customer insights to generate innovations can be a distinct competitive advantage for telcos because few other companies understand the consumer behavioral patterns better. Telcos know who their subscribers call, for how long, and at what times. In combination with an online portal as part of the portfolio (e.g., T-Online), telcos can combine that knowledge with search preferences, information on areas of interest, and possibly, buying behaviors. These sources provide telcos with unique insights for generating new information, but today remain under-leveraged in many cases. The concept of

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Successful companies have a differentiated radical innovation process

the innovation wheel (Exhibit 2) can help companies systematically address all three sources of innovation (i.e., customer, technology, and industry conduct). 4) High performers have differentiated, radical innovation processes for managing creativity, learning, and discipline. They realize that specific success factors exist for radical innovations and handle them accordingly (Exhibit 3). Their radical innovation processes include decision points specific to the innovation that may vary from case to case; they pursue flexible timing for decision making gates, depending upon the availability of information; and they avoid simple “go/no-go” decisions regarding products in favor of more nuanced practices (e.g., repeat, grow, or wait). In order to give the innovation venture the flexibility to grow, high-performing companies pursue more radical topics in different organizational settings. Therefore, many have set up business development organizations with dedicated budgets that are responsible for driving radical innovation projects until they are ready to become business units in their own right or are migrated into an existing BU. 5) High-performing companies exhibit superior skills when it comes to executing commercialization rollout plans for innovations. They establish both a compelling benefit and “reason why” for each innovation that can

be easily communicated. They use aggressive pricing schemes during launch to gain scale and customer experience, they systematically select new sales channels to achieve rapid ramp-up, and they apply non-traditional marketing concepts. To ensure rapid scale-up, these companies continually enhance the usability of products based upon immediate feedback from the market. When comparing innovative services between countries where the service was successful and countries where the service failed, the failure could very often be ascribed to those factors in commercialization. 6) Superior innovators are aware of and consciously break orthodoxies that could hinder their attempts to engage in large-scale innovation. These limiting conventions are the beliefs and decision making patterns an organization creates over time and reinforces via processes and metrics. Companies tend to adhere to self-imposed industry- and company-specific conventions, which usually favor the pursuit of incremental ideas targeted towards existing categories and consumers. Some typical conventions in the telecoms arena include extremely high-quality standards or that business opportunities should only be sought in the core telco business (Exhibit 4). Successful innovators have a clear understanding of the orthodoxies that limit the company’s innovation performance and tend to be led by

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Examples of common orthodoxies

strong and inspiring leaders who create enthusiasm and empower project managers to make the necessary decisions. 7) Finally, the biggest differentiator between successful innovators and the rest is whether the company culture fosters innovation. Successful innovators’ cultures are characterized by being inspirational, diverse, adaptable, entrepreneurial, and willing to experiment, and they encourage diverse thinking. Low performers, on the other hand, tend to characterize themselves as slow moving, inefficient, and lacking in shared purpose. Successful innovators have inspirational leaders in place who are really committed to innovation – in some cases, willing to bet their careers on big opportunities. McKinsey’s findings reveal that a company that underperforms in these areas typically can’t succeed in terms of other innovation elements. It was found that low organizational performance can be detrimental to innovation and that success in innovation performance must be based upon a solid, healthy, and innovation-friendly organizational culture. Overall, the survey shows that the innovation elements that deliver the highest levels of differentiation are aspirations and strategy, rollout, and organization and culture. Likewise, successful innovators “rev” these

and every other element at higher speeds compared to low performers. C. The last frontier. In some areas, even high-performing innovators continue to struggle with the innovation process and rollout ineffectiveness. In fact, the research shows that high performers often need to address challenges they face regarding incentives, risk taking, and radical innovation. For example (Exhibit 5): Incentives. Not enough companies have incentives in place that align with innovation responsibilities, say that innovation target fulfillment has a significant impact on management compensation, or that contributions to innovation programs are explicitly addressed in their standard talent evaluation processes. Risk taking. Too few companies believe they have enough leaders willing to bet their careers on the success of innovation projects and not enough strongly encourage risk taking or accept high risks if significant opportunities could be captured. Radical innovation. Most companies state they are not good at managing radical innovation or don’t understand that specific success factors exist for radical innovations and handle them accordingly. Going for the “big bets”

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The last frontier – even high performers need to address challenges with incentives, risk-taking, and radical innovation

remains a challenge for many companies. Because of this, doing radical innovations right can become a key source of competitive advantage. *** In order to Innovate@Scale, companies need to have all innovation elements aligned and running. Few companies maintain the various elements well and even fewer keep all elements highly tuned – but those that do, generate the sustainable horsepower needed to meet the market head on and emerge as winners time and again. By Fabian Billing, Axel Krieger, Boris Maurer, Christopher Schorling, and Lothar Stein

¹ The survey included 820 responses from 79 companies and 104 business units in the automotive, telecoms, high-tech, and transport and logistics industries. Auto industry companies represented nearly 45 percent of the total and respondents, while global, were predominately focused in Europe.

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Opportunities in Marketing: The Rise of Digital Marketing
As digital marketing nears a tipping point, media and telecoms players see new opportunities to fund digital services. But challenges loom, including media budget diversions and online digital content services attackers using digital advertising to fund digital convergence. To better understand how online marketing will evolve, we surveyed over 410 marketing executives from public and private companies around the world in a variety of industries, including telecoms. Selected results include: The executives confirm public sources that spending on digital advertising will increase across the board by significant margins. Currently, 22 percent of our respondents advertise on blogs, 15 percent on social networks, and 10 percent on wikis, widgets, and virtual online worlds. Collaborative tools such as blogs, wikis, and social networks are also being used beyond advertising for product development and customer service. Telecoms executives expect that 55 percent of their consumers will use the Web to become aware of new products or services, 63 percent will use it for information search, 54 percent for price comparisons, 40 percent for buying online, and 56 percent for aftersales service. We have identified a set of likely consequences for the dynamics of digital content services (DCS): the Web will become a core component of the value proposition of DCS; online advertising will grow large enough to fund new business models; online marketing will affect the dynamics of DCS; and the time to act is now. The emergence of digital advertising may also create a new source of relevant funding that could critically affect DCS value chain dynamics – from ad-funded WiFi networks to new online video platforms to mobile search and beyond. As in any major revolution, creative destruction will occur as industries confirm the arrival of “new kids on the block,” such as Google, MySpace, and Joost. Incumbents that act quickly and execute superbly will likely be able to use this inflection point to reposition themselves and drive profitable growth. This article is an excerpt published originally in McKinsey’s Digital Content and Services brochure, 2007. By Jacques Bughin, Nicole Baumüller, Christoph D. Erbenich, and Amy Shenkan

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07 Start it Up –

Four Steps to Overcoming the Innovation Dilemmas of the Industry

The previous articles have shown that telecoms operators still struggle when it comes to Innovation@Scale and how to address this challenge from multiple angles. Looked at from a global perspective, telecoms companies are still experiencing growth well above that of GDP, and this growth – mainly concentrated in emerging markets coming from increased mobile and broadband penetration – is expected to continue for the next several years. New services and applications in developed markets comprise a relatively small share of overall growth, so that innovation is seen as unnecessary in an environment of profitable emerging markets. There is widespread sentiment that the industry can live on this type of growth for many years before turning its head towards innovation. Beyond this lie three, industry-specific dilemmas that conspire to further hinder innovation progress: The 40 percent EBITDA dilemma. A core orthodoxy of telecoms companies is that only businesses with 40 percent EBITDA margins really create value for the company. Most of the over-the-top or adjacent opportunities fall short of this threshold. Holding these opportunities to the same standards of existing basic infrastructure services is a setup for failure and makes it difficult to realize the potential that lies in these areas. The scale dilemma. The lifeline of telecoms companies is the services they deliver to mass-market segments based on massive infrastructure investments. In this context, business opportunities are measured in the hundreds of millions of euros, if not billions. Adjacent businesses do not typically deliver on this type of scale,

and this is just another way in which their potential is overshadowed by mass-market services. The margin pressure dilemma. The most prominent challenge for the majority of telecoms operators is margin pressure. The necessary investment that comes with a commitment to Innovation@Scale is seen as a risky investment in uncertain future revenue and margin streams. Most telecoms companies have less than stellar records of turning innovation investments into the types of returns that justify the commitment. This history makes it difficult for capital markets to give telecoms operators the green light to invest heavily in innovation strategies. The assumption held by capital markets and investors (including PE) is that telecoms operators are not able to remove these barriers to innovation and should simply focus on opportunistic growth capture and operational improvements. This is also reflected in the valuation of the telecoms industry. While telecoms infrastructure services continue to drive overall economic growth, telecoms stocks themselves reflect only very limited long-term growth expectations. In the following, we provide a four-step approach that empowers top management to seize innovation opportunities that to date may seem difficult to capture from the inside and unpopular from the outside.

Step 1: Aspire – the balanced portfolio indicator
The initial exercise defines a clear aspiration for the company (i.e., the aspired level of growth through organic

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and inorganic measures) and then reveals where the company stands against the aspiration. The balanced portfolio indicator creates an understanding of the current status along three dimensions: (1) the expected stream of profits into the future from existing businesses, incremental improvements, and identified and addressed opportunities, (2) the risk profile of the current portfolio of activities, and (3) the aspirational growth dynamic and risk profile. The McKinsey balanced portfolio indicator positions the contribution of future growth businesses and the respective risk attached to it against the contribution of current businesses. The higher the indicator index the better the likelihood of securing growth over time. Top-down ambitions for the future can be defined and then validated based on this analysis (four to eight weeks). With this understanding the company can ascertain the gap between the aspiration and the potential of the current portfolio and work towards closing it.

markets opposition. Pursuing these new ideas could mean shifting the attention of the best talent and top management away from operations and more towards creation and trading. It could also mean a shift from local network operations to a global perspective (potentially with new partners). The McKinsey distance-from-the-core analysis helps to determine the best approach to the new concepts. There are four distinct choices when it comes to building a new business, and this analysis can guide the selection. Should the company: Just do it – little disruption to the core, existing leadership can deal with it, same channels Change, then do it – understand the particular dilemmas at work and address them first Source/partner – enter into new businesses jointly with other companies or Break out – completely separate the new business from the core business. Given the complexity of these decision making processes, the actual time frame for Step 3 may be one to three months. This is the ideal innovation process stage to begin demonstrating the belief in the new businesses prospects for success. For example, a dedicated team could create and launch a commercial pilot.

Step 2: Create – the “Collide! Iterate! Expand!” framework
McKinsey’s “Collide! Iterate! Expand!” framework offers an approach to innovation, which considers technology, customer benefit, and the business model. Specifically, it is a tool used to discover the opportunities coming out of improved telecoms infrastructure and emerging areas of competition. The framework facilitates the identification of broad innovation search fields, then distills more specific ideas. In addition to using this established framework, it is important for telecoms companies to plug into the outside world. Telecoms operators should meet with the most advanced companies and institutions globally and look for the help and support of the world’s best ideation companies (e.g., Innosight or IDEO). This step can take anywhere from four weeks to six months – depending on the starting position and the nature of the search fields that will be pursued.

Step 4: Get it done – the speed-to-scale environment
Defining a portfolio of initiatives based on first business cases means finding a home for each new business. To successfully commercialize a new business, its new home should be a speed-to-scale environment, which includes six key elements: 1. The organization is aligned with the business objectives and has the right incentives to make the new business fly. 2. The organization is set up in a way that top talent finds it attractive. 3. The new business has adequate funding, so that business decisions can be acted upon with relative freedom, facilitating the reaching of milestones.

Step 3: Make or break – the distance-from-thecore analysis
The step from idea generation to more specific concept generation is most important. It is not so much that most telecoms operators lack ideas that they could pursue in some shape or form. The question lies in which ideas they would place their bets on given the capital

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4. An external network of partners and relations helps to shape the environment – including the communication to investors and markets to protect the activities. 5. Company-wide governance is aligned. This holds the businesses together and creates the necessary synergies and unified mindset. 6. Leadership is willing to face opposition, committed to making the new business fly, and backed by a top management that visibly stands behind the venture. This last step will take 6 to 18 months and should be carefully planned. There are not many first-mover advantage examples in telecoms to point to, but many of the early failures lacked this most important element.

*** The telecoms industry is a prime example of how intelligently serving the long tail is made unappealing by “short tail” successes and seemingly impossible by inhospitable internal and external factors. Nonetheless, telecoms operators with an eye on the horizon have to shift their perspectives. New business models are value creators and the relative value of pure infrastructure businesses will diminish over time. Industry leaders will be the ones who place more emphasis on the creation of new assets and the trade of non-core assets, shifting their focus from the efficient operation of current assets. This shift from operation to creation and trade will require a leadership willing to take risks. Innovation@Scale is the only way for a telecoms company to create sustainable performance and keep or grow its share of the pie. By Thomas Barta, Fabian Billing, Boris Maurer, and Bernhard Schmidt

RECALL No 3 – Innovation@Scale Innovate@Scale – How Nokia Does it

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08 Innovate@Scale – How Nokia Does it
Interview with Jarkko Sairanen, Nokia’s Former Vice President of Corporate Strategy

If a formula existed that could deliver successful innovations on schedule, every company could be a winner. Most managers will agree that innovation drives success, but there is no blueprint to show them how to generate it. The best innovators, like Rudyard Kipling’s cat, tend to walk alone. Nokia is the world leader in mobility and is currently driving the transformation and growth of the converging Internet and communications industries. The company makes a wide range of mobile devices that provide music, navigation, video, television, imaging, games, and business mobility. Nokia also provides equipment, solutions, and services for communications networks and is extending its business from devices into experiences and services. To learn more about Nokia’s approach to innovation, we spoke with Jarkko Sairanen, the company’s former Vice President of Corporate Strategy. Jarkko and his team drive Nokia’s strategic priorities and decision making, the scope of which includes business strategy and development as well as technology strategy. Prior to joining Nokia in 2001, Jarkko worked as a management consultant for nine years in Munich and Helsinki. Jarkko earned an MBA from INSEAD in France and an M.Sc. from Helsinki University of Technology. He has already decided on his next challenge: he is moving to head Elektrobit’s automotive software business. Our discussion centered on the importance of innovation at Nokia, how the company organizes for innovation and how it launches innovations onto the market. We also discussed Nokia’s outlook for the industry, and how it innovates at scale.

McKINSEY: How would you characterize Nokia in terms of innovation? JARKKO SAIRANEN: Nokia has always been ranked quite highly in terms of being innovative. In offering wireless voice, we have created the opportunity to change people’s lives in fundamental ways. If you consider wireless voice when it started some 15 years ago, it was simply a business device. Today, three billion people use mobile phones. In 2010, it will be four billion people and probably some five billion in 2015. A good comparison that I have found for these figures is the number of active toothbrush users on this planet, which is about four billion today. It would be very difficult to imagine what life would be like today without this connectivity. We think in terms of systems or platforms, which provide the opportunity for us and others to further innovate. McKINSEY: What do you mean by “systems,” in contrast to products or features, which many people consider when talking about innovation? JARKKO SAIRANEN: I think innovation runs much deeper and broader. A product or a feature is just one incident – it might help you to increase your market share temporarily, but it does not necessarily create sustainable value. You have to continuously renew, and drive your paradigms from a perspective of sustainable value creation. Thinking in systems is long-term oriented. Creating “connectivity between people” instead of just “access independent of locations,” for example, was a system which enabled hundreds of product or feature innovations. The next system might be not only “accessing the Internet to support our life” but “living our life

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through being in the Internet.” Again, creating this innovation system or platform will allow us and others to build many products, features, and services around it to create value. This should be the fundamental definition of innovation. The second aspect of the innovation system is having the agility in your strategy, your organization, and your offering to make what you are doing sustainable in the long term. McKINSEY: What are the key elements that create agility and make your system work? JARKKO SAIRANEN: Being agile means continuously embracing the environment as it changes and grasping the opportunities it offers. As an organization, we challenge the current state all the time; we don’t relax because we have reached a 30 percent or 35 percent market share. We know that the competition doesn’t sleep, and today you have to run as fast as you can simply to stay in place. Such thinking must exist in the genes of the company culture. The organization must be continuously hungry to evolve further, no matter how successful it is at any given stage, and must understand that what it does today will probably not sustain it tomorrow. There is a cultural element attached to this that requires you to have the appetite to keep trying new things, a readiness to accept failure and an understanding that some overlapping work will take place in the organization. You let themes evolve; you let people and teams pursue their own initiatives; you don’t attempt to guide or drive everything from the top down. At Nokia, a lot of decisions occur deep in the organization, where product managers make decisions and people innovate across different topics. McKINSEY: It would appear to be extremely difficult for corporations to sustain such a culture and way of working for long periods of time, but Nokia somehow seems to have mastered this approach. What’s your secret? JARKKO SAIRANEN: We are an old company established in 1865. Nokia has reinvented itself many times and during that journey we have started to build some unique capabilities and cultural elements into the company. We have very good fundamentals, which reside deep in the culture and in the way our company works. Naturally, we also have a number of challenges as all companies do. We are far from being perfect or being able to do everything that we would like to do, or that should be done. But, importantly, everyone in the organization wants to exceed his or her targets and wants to drive the company forward.

McKINSEY: Do you incentivize innovation in your organization? JARKKO SAIRANEN: We don’t have a fundamental process for innovation as such. Instead, it is embedded in our daily work, like quality. If a company really works to achieve world-class quality, that thinking becomes embedded throughout the whole life cycle, and it becomes something that every employee knows – it’s not something that has to be managed separately. In many ways, innovation is similar to quality – we don’t have a separate process or an incentive structure for innovation – it’s part of the work that people do. McKINSEY: If you look at large-scale, transformational innovation, such as moving from wireless voice to the Internet, how important is that for Nokia? Is it something you put significant effort behind, and how? JARKKO SAIRANEN: It is very important and we have put significant effort behind it. We do vision work, which we call the Nokia World Map. Here, we look at the key trends: What is happening in the consumer space? What are the operators doing, and how are they thinking? What is unfolding in terms of technology evolution? What’s new in the retail distribution landscape? What do we believe are the market fundaments, and what types of things are selling? We look at the business environment and competition from multiple angles, and in addition to the trends, we also work through where the trends could lead. A good example involves our work in 2002, when we were talking quite a bit about social networking and how it would be done in the future with mobile devices. Now in 2007, we are at the point where you can use the Web on your mobile device to participate in your favorite social communities. That process of describing the environment is important to crystallize different missions and strategies. The output where we look into the future is available for all our employees, so everyone can read it and people can discuss it. This stimulus is brought into the organization and people begin to act on it, and realization begins. Then gradually, the “operative machine” comes along behind and begins to implement. However, a key challenge is how fast we can bring all of our thinking into devices, experiences, and the business system. McKINSEY: Is the “source” behind those ideas the same machine that turns out your current products? Or are you positioning resources separately?

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JARKKO SAIRANEN: We have investments in a couple of different funds, where we participate and discuss things with start-ups and communities, similar to a traditional venture capital fund. We also have a more strategic fund where we invest in the ideas that support the Nokia ecosystem. Our corporate venturing unit is the Nokia Emerging Businesses Unit, which has dedicated funding put aside for it. There, we can go to the market fast and easily and test things. And then we build seeds for deeper innovation at the Nokia Research Center. The fundamental drive of all these activities is not to diversify Nokia but to incubate seeds, which renew us and which we can scale up with our “operative machinery” later on. There are different teams experimenting, and if we see that something is meaningful, we use it globally, scale it up, and embed it into our core activity. McKINSEY: Once you find a topic that has the potential to be marketed globally, how do you launch it and scale it to the market? JARKKO SAIRANEN: It depends on the nature of the topic. A good example might be Linux and Open Source. We began a new device platform based on those technologies a few years ago, both to make an ultra-portable category device and to embrace the open source movement. This innovation began as a small, separate entity in our core business. This entity is today producing devices like the Nokia 770 and the Nokia 800, which are Linuxbased, and wireless LAN-connected Internet tablets. At the same time, we created a new software platform capability and were driving a new paradigm. Regarding mobile TV and how digital video broadcast technologies can bring live broadcasting to devices, we worked for a relatively long time in the venturing mode to get the technology up and running – actually as a seed from our set-top box business. When the technology was validated, there seemed to be interest in the ecosystem, so we moved it to our core technology platform in order to make a broad range of different devices that support broadcast TV. In principle, we move things as soon as feasible into our core activities, but we shouldn’t move them too early. Finding the right time and having a low “burn rate” so that innovations do not die too early are critical things. Managers require insights and intuition if they are to understand what makes sense at what stage. Here at Nokia, we are a networked organization that is connected to innovation, if you want to simplify it. There is nothing that you could accomplish in this

organization alone. Nothing. Everyone is extremely interdependent. Through this network, we have transparency –we know what’s happening in different parts of the organization – instead of thinking in terms of silos and separate kingdoms. McKINSEY: How do you create real accountability? JARKKO SAIRANEN: There are naturally champions who push for things, and having a network does not mean that a person can rely on others to do things automatically. The fact that you are championing independent of authority over the other people implies that you have to pull them along with you. You need a small team that extends across the organization to put the next paradigm forward. In our environment, we have more ideas, more opportunities to execute, and if you don’t have support, things don’t move. McKINSEY: How do you prioritize? JARKKO SAIRANEN: I don’t think we are a textbook example of a systematic approach, managing a pipeline and portfolio of ideas where we rationally and analytically decide that we can afford seven out of ten ideas. We are more like a living organism than a systematically managed process where a forum makes informed decisions based on analysis of data. At Nokia, things just happen. If your strategic direction is clear, this is a much more powerful way. McKINSEY: What role will Europe play for you in terms of innovation? Will Europe be the driving force for innovation in this industry, or are the sources of innovation regional? JARKKO SAIRANEN: It is extremely important to think globally and, as our CEO has stated, “Nokia is the most global company.” A lot of innovation occurred in Europe because we standardized smartly and got things going. Take, for example, the Internet paradigm and the social networking innovation Web 2.0, which will be relevant for all of us. A lot of this work has been driven in the United States, especially for enterprises, but you also have to look at China, which has its own model. So, you can take things locally or regionally where they are born, and deploy what can be deployed globally. McKINSEY: Will European-based hi-tech and software leaders be dominant in setting global standards? Will Europeans lead the next wave when it comes to the wireless Internet?

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JARKKO SAIRANEN: It’s not really about geographical focus as such; it’s more about companies that are playing important roles in thinking and acting globally. There will be only one Internet; we are accessing it through different types of devices and that’s the way it is being shaped. When I think of the Internet, it’s not about accessing it. Instead, it’s about being connected all the time. We are investing a lot of effort into putting enablers in place so that our devices can do the same things that you do on your PC – and even much more. There are also a lot of innovation opportunities for small companies, as, for example, MySpace and YouTube have shown. I don’t think this is a system that will be driven by geographical policies. Instead, we have to be very capable and agile when it comes to implementation. The big challenge now involves pulling all of this innovation for the Internet together through wireless devices that can be connected constantly. Most importantly, can we drive usability and simplicity to levels where the devices will be adopted by the masses? Here, we think of 2 billion, rather than 200 million, people beginning to use them.

McKINSEY: What are the key ingredients that drive market success for Nokia? JARKKO SAIRANEN: One factor involves our go-tomarket capabilities. If we did not have our “backbone” that is capable of producing, shipping, selling, and delivering to people – it currently handles about 13 devices every second, integrating some 350 components in each one of them – we just couldn’t push the next paradigm through. It would be much more difficult to get our innovations into people’s hands. One of our big successes has been putting in place the extensive number of distribution outlets we have in the emerging markets. For example, in India we have something like 80,000 outlets, and globally we have roughly 350,000 outlets selling Nokia devices. The next factor involves driving innovations to scale. It would be impossible if we did not have a platform approach because we wouldn’t be able to extend innovations to a broad range of devices. Finally, take the Internet with its open technologies and the open-end standards used. This will now be much more difficult for companies that don’t already have the right mentality and assets in place.

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McKinsey’s Telecommunications Extranet
McKinsey’s Telecommunications Extranet is the gateway to some of the best information and most influential people in the telecommunications industry. The Extranet offers selected McKinsey-generated information that is not available in the general Internet. Extranet users have access to selected McKinsey articles on subjects ranging from Industry & Regulation, Growth & Innovation, Sales & Marketing, Services & Operations, IT & Technology, Corporate Finance, Organization & HR, Corporate & Enterprise, and Equipment & Devices. Direct communication channels ensure that your questions and requests will be addressed swiftly. The site is updated weekly with new articles on current issues in the industry. Through McKinsey’s Telecoms Extranet you can: Obtain exclusive information – free of charge – and take advantage of an Internet portal specifically designed for the industry. Access cutting-edge business know-how, interact with other experts to gain new perspectives, and contact leading industry professionals. Stay well-informed with daily industry news from factiva that you can tailor to your needs and interests. General information about the site is available at: http://telecoms.mckinsey.com Contact: telecoms@mckinsey.com

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The Telecommunications Practice
McKinsey’s Telecommunications Practice serves clients around the world in virtually all areas of the telecommunications industry. Our staff consists of individuals who combine professional experience in telecommunications and related disciplines with broad training in business management. Industry areas served include network operators and service providers, equipment and device manufacturers, infrastructure and content providers, integrated wireline/ wireless players, and other telecommunications-related businesses. As in its work in every industry, the goal is to help McKinsey’s industry clients make positive, lasting, and substantial improvements in their performance. The practice has achieved deep functional expertise in nearly every aspect of the value chain, e.g., in capability building and transformation, product development, operations, network technology, and IT (both in strong collaboration with our Business Technology Office – BTO), purchasing and supply chain, as well as in customer lifetime management, pricing, branding, distribution, and sales. Furthermore, we have developed perspectives on how new business models and disruptive technologies may influence these industries.

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About the authors
Rolando Balsinde is a Director in McKinsey’s Madrid office. rolando_balsinde@mckinsey.com Thomas Barta is a Principal in McKinsey’s Cologne office. thomas_barta@mckinsey.com Nicole Baumüller is a Consultant in McKinsey’s Frankfurt office. nicole_baumueller@mckinsey.com Jens-Olaf Berwig is a Manager in McKinsey’s Hamburg office. jens-olaf_berwig@mckinsey.com Fabian Billing is an Associate Principal in McKinsey’s Düsseldorf office. fabian_billing@mckinsey.com Jacques Bughin is a Director in McKinsey’s Brussels office. jacques_bughin@mckinsey.com Claudia Bünte is a Manager in McKinsey’s Hamburg office. claudia_buente@mckinsey.com Christoph D. Erbenich is a Principal in McKinsey’s Frankfurt office. christoph_erbenich@mckinsey.com Nuno Goncalves Pedro is a Telecoms Expert in McKinsey’s Beijing office. nuno_goncalves_pedro@mckinsey.com Dylan Henryson is an Associate Principal in McKinsey’s Brussels office. dylan_henryson@mckinsey.com Peter Karlströmer is a Principal in McKinsey’s Dubai office. peter_karlstromer@mckinsey.com Jan-Christoph Köstring is a Consultant in McKinsey’s Hamburg office. jan-christoph_koestring@mckinsey.com Christian Kraus is a Consultant in McKinsey’s Berlin office. christian_kraus@mckinsey.com Axel Krieger is a Principal in McKinsey’s Munich office. axel_krieger@mckinsey.com Markus Löffler is a Principal in McKinsey’s Stuttgart office. markus_loeffler@mckinsey.com James Manyika is a Director in McKinsey’s San Francisco office. james_manyika@mckinsey.com Boris Maurer is a Principal in McKinsey’s Berlin office. boris_maurer@mckinsey.com Daniel Pacthod is a Director in McKinsey’s New York office. daniel_pacthod@mckinsey.com Parviz Parvizi is a Manager in McKinsey’s Boston office. parviz_parvizi@mckinsey.com Bernhard Schmidt is an Associate Principal in McKinsey’s Munich office. bernhard_schmidt@mckinsey.com Christopher Schorling is a Principal in McKinsey’s Frankfurt office. christopher_schorling@mckinsey.com Amy Shenkan is a Sales and Marketing Expert in McKinsey’s San Francisco office. amy_shenkan@mckinsey.com

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Pål Erik Sjåtil is a Principal in McKinsey’s Oslo office. palerik_sjatil@mckinsey.com Lothar Stein is a Director in McKinsey’s Munich office. lothar_stein@mckinsey.com Katrin Suder is a Principal in McKinsey’s Berlin office. katrin_suder@mckinsey.com Yael Taqqu is a Principal in McKinsey’s New York office. yael_taqqu@mckinsey.com Haiko van Lengen is an Associate Principal in McKinsey’s Berlin office. haiko_van_lengen@mckinsey.com Jon Wilkins is a Principal in McKinsey’s Washington, D.C. office. jon_wilkins@mckinsey.com Michael Wilshire is a Principal in McKinsey’s London office. michael_wilshire@mckinsey.com

Telecommunications Practice 2007 Copyright © McKinsey & Company, Inc.
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