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American Switching Systems

Development Project Choice

06/2006-4572
This case was written by CHRISTOPH H. LOCH, Professor of Technology and Operations Management, and
JRGEN MIHM, Assistant Professor of Technology and Operations Management, INSEAD. It is intended to be used as a
basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.
Copyright 1996 INSEAD. Revised Version 2006 INSEAD
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696-025-1

It is 3:00 PM, March 1, 2006. Pete Bilinsky, CEO of American Switching Systems, is
thinking back to a heated meeting held that morning about the future of the 950FX
development project. In attendance were Bob Dull, the head of marketing, newly
arrived from the voicemail unit of Northern Telecom; Nancy Klinkenbaum, the
director of sales who reports to him; Mark S. Aleck, an engineering veteran who
heads R&D, competitive intelligence, and technical field support; CFO Srini
Ramanujan; and market analyst Carlos Grozas. Aleck brought along three of his
direct reports, and Grozas presented a market prospect analysis of the system.
American Switching, the fourth-largest mobile network equipment manufacturer
worldwide, started in 1969 to make radar control computers, and then moved into
private premise equipment after 1975, when the defense budget plummeted after
the end of the Vietnam War. This shift was a natural extension, because both
radar controls and the microwave links used as backbones at the time posed the
same challenge: high performance analog radio engineering. In the mid-1990s,
American Switching foresaw the boom in mobile communication and moved from
microwave backbone links and antennas into the newly evolving area of base
stations and antennas. A base station is a radio station that controls the connection
among individual mobile phones and the core phone network within a defined
area around the station by controlling access and relaying communication to the
core network.
The customers of American Switching, mobile phone operators, have spent
several billion dollars over the last few years on licenses for next-generation
networks (3G) and are either building networks or thinking about them. To
recoup these costs, these operators aim to increase average revenues per user by
offering value-added services, such as music downloads and even television
services. However, enthusiasm about these systems has faded somewhat, and
many players are rethinking their 3G strategy.
American Switching has risen to its prominent position by being competitive in
several market segments. Since 2000, microwave links have been used
predominantly to connect the individual base stations of a mobile phone network.
Therefore, American Switchings business is intimately related to the mobile
phone business, within which the company is active in three segments:
microwave electronics, antennas, and base stations. The microwave electronics
and microwave and base station antenna businesses have been very stable.
Especially in the microwave business, American Switching has been able to offer
a technically superior product at only a slightly elevated cost.
The base station business, in contrast, has become turbulent. American Switching
offered solid and successful products that relied on 1990s technology, GSM (2G)
base stations, supported by its high-quality administration software for those
systems. At the beginning of the new millennium, when business was booming,
the company decided to invest in the development of next-generation (3G) base
stations, embodied in the 900X product, and comparable infrastructure. Late to
the market, the company planned to leapfrog the competition through technical
superiority. However, the technical complexity of the project caused a significant
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time delayby the time 900X hit the market, competitors had improved their
base stations well beyond the 900X. Thus, by 2006, the system had conquered a
stable but small market share. Moreover, some inherent system stability issues
have never been resolved fully, which has led to high maintenance costs and
reliability problems and limited further growth. During the past two years, the
900X has been marginally profitable but not recouped its large initial
development costs.
Although after 2000, industrialized countries have planned only new 3G networks,
nearly all existing networks are 2G and require massive upgrades. Operators are
divided about whether investing in 3G makes sense, at least for now. Those that
do not have immediate capacity problems are delaying their investments in 3G.
In addition, technical trials that are functional and online in some companies since
2002 suggest that new technologies on the horizon could make 3G obsolete
altogether. The most prominent of these new technologies is IEEE 802.16, an
open standard backed by Intel. These technologies do not allow for full mobility
(handover from one base station, or cell, to another during a call), and
therefore, they cannot be used for mobile telephony (calls or downloading files
from moving objects, such as cars). However, nomadic use is possible, which
means that users can use their notebook at work, at home, in a friends house, or
even in the park. Many industry pundits argue that downloading files in a moving
car is an unrealistic scenario anyway and that a combination of 802.16 and 2G
would conveniently satisfy customer needs.
Furthermore, technological
development is not standing still; IEEE is working on an extension of its standard
to incorporate mobility.
With the boom of the late 1990s definitely over and markets generally slowing,
times have become much tougher, and American Switching has grown by less
than 5% annually, barely managing to stay profitable with its 2004 sales of $850
million. In two rounds of cost cutting, 25% of personnel were let go, leaving the
company with 3,000 employees.
Even American Switchings core, the
engineering department, suffered a 2% staff cut, which has not exactly boosted
morale.
The meeting this morning therefore was slated to discuss the upgraded 950FX 3G
base station, which the engineering department hoped would pull the company
out of trouble. Marketing had invited Grozas to present a market size estimate
(Exhibit 1), which Aleck was busy tearing into:
Aleck:

Come on, you just dug up these numbers because you were
against the 950FX from the beginning. Im telling you, this is way
too conservative for the upgraded 3G systems. Look at all the
new services possiblestreamed audio, streamed video, mobile
TV, not to mention online gaming possibilities and even
convergence of fixed and mobile services. All the network
operators will have to upgrade.

Copyright 1996 INSEAD

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And besides, the 950FX will blow into the market, increasing
downstream data rates to 14.4Mbit/s and upstream to up to
3.6Mbit/s. We are going to be the first ones offering HSDPA
[high-speed downlink packet access]. Thats gotta increase our
market share. And, the project will clearly be profitable. [See
Exhibit 2.]
Dull:

Mark, that sounds real good, but so far we only have it on paper.
Remember the 900X? And also, the market for high-speed
mobile services is there, sure, but the question is when will it
catch on? Mobile TV is just a buzzword, and whether customers
will really appreciate it is an open question. And do you think
Nokia and Ericsson will just sit back and watch? I dont see on
which dimension the 950FX will be so superior that we can
increase market share where we are the weakest and under
attack.
Believe me, the real threat is coming from 802.16, on the horizon,
you know, the new standard for wireless access. Deutsche
Telecom and Alcatel/Lucent are already doing public beta tests
on the standard. They are backed not only by Nokia but also by
Intel to provide integration in all of the notebooks. We still have
time; right now the standard does not allow for fully mobile users.
They can only be nomadicthey have to stay in one spot while
using it. So they could not have a phone call while driving. But
the IEEE is specifying an extension in the air interface to allow for
full mobility. The full brunt of this will not hit our markets until
about seven years from now, but weve got to be ready when it
comes to blow us away. Many mobile operators may decide not
to jump to HSDPA, the standard behind your 950FX, altogether.
So why dont we upgrade the 900X as much as necessary and
otherwise focus on the next winner, 802.16, letting 3G HSDPA go?

Aleck:

You know very well that the 802.16 is a high-risk project. The
802.16, and even more its extensions, is a long shotit looks hot
now, but it only allows for moderate data speeds, even by todays
fixed line standards. And being able to access the network from
different spots may be overrated. Id rather do a new server for
ring tone, game, and music downloads. These annoying ring
tones make a nice business that is growing attractively, at 21%
last year. It would be captive volume with attractive value
addedwhy leave this to suppliers?

Klinkenbaum: But Dr. Aleck, we are having a good experience with Octelthey
are one of the biggest server providers, the integration with our
network systems is highly rated, and they put a lot of resources
into upgrading the system, more than we could do. We just dont
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see the need to go for our own system.

stretching too far, dont you think?
Ramanujan:

Wouldnt that be

Excuse my interruption, but dont forget that we are behind in

serviceability for nearly all of our products, and our
manufacturing cost needs reducing. Nokia and Siemens have
much better remote diagnostic capabilities than we have, and
manufacturing complains about complicated mechanical and
wiring structure. They think a redesign effort could cut out 18%
manufacturing cost. These projects should also be on our screen.
Look, it seems to me that we cant do all of what is being
discussed here. My staff has collected from marketing and
development the projects under discussion and the estimated
development times and efforts. [See Exhibit 3.] We have to
choose or spread projects out. Cmon, guys, you have to admit
that. What shall we do?

Dull:

I fully agree. We have to focus on the core business. We keep

focusing attention on base stations because this is where the
action is. But if you look at what works best for us, it is our
microwave link business. The market is slowly shifting under our
feet, and the MW500 and MW700 links are gradually losing their
superiority. We really need to rework our power amplifiers.
Integrated circuits are more and more becoming able to do the
job, and sooner or later somebody is going to exploit that. I hope
it is us. Plus, our service contract margins are a disgrace.
If we must do something new, lets look at an adaptation of your
MW500 to the low end. In developing countries, operators are
more cost conscious, and they dont need the high data transfer
rates. We could downgrade our MW500 system to a MW500L
[light] system to build market share in these areas.

Aleck:

You know that downsizing never works. Weve been over this
before.... The oscillators and mixers are to expensive and need to
be downgraded, the amplifiers are too expensive and need to be
downgraded and in the end, we have touched all the parts! But
you are right, Bob, we need to do something about the core
business. However, the microwave links are just one element.
What about the antennas? 3G antennas are not yet very well
understood, and the directional characteristics of antennas on the
market (including ours) is not yet where it should be. Here is an
opportunity to build our base.

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And by the way, Bob, really, are you guys in touch with the
market at all? When did your group last do a real customer
survey? Do you have customer feedback by segment? As far as I
know, you dont. My engineers and field people talk to the
customer technicians all the time.
Dull:

Well, I ... your engineers always think ...

At this point, Pete Bilinsky interrupted to get the meeting back under control:
Listen, lets not let this get too heated. Its clear that there is no action required
in the 2G segment, but on all other counts, we are exchanging opinions here, not
well thought-through assessments. I propose that we reconvene tomorrow at
10:00 AM, and everyone brings with him or her a sheet with a relative comparison
of the merits and risks of the projects discussed. Put your people to burn some
midnight oil. I think the situation warrants the effort.
After the meeting, Ramanujan walked up to the CEO in the hallway to say: Look
Pete, we really have to worry about whether development can do what they say
theyll do. Their on-time and on-budget record in the past has been somewhat
less than stellar. I did not want to add fuel to the fire during this meeting, but I
have prepared this little analysis on past development projects. We need to be
conservative in planning market introductions. See ya tomorrow. He handed the
CEO a sheet of paper (Exhibit 4) and walked off.
Bilinsky is staring at the analysis now, wondering how he can nudge the group to
reach a consensus that would leave him confident about the next five years.

Copyright 1996 INSEAD

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Exhibit 1
Market by System Generation

25
American Switching
Systems market share
2005:

Billions of USD Market Volume

20

N/A

802.16

15
N/A

3G HSDPA

10
3G base

2G
Microwave Links

0
2005

Overall

Antennas

2006

2007

2008

2009

2010

5.3%
9.4%
34.6%
23.9%
14.9%

2011

Year

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-14.0

Cumulated discounted Cash Flow

(including sunk cost)

Copyright 1996 INSEAD

Revised Version 2006 INSEAD

-14.0

Discounted Profit per Year

0
1.00

PV Factor Discount rate 10 %

Year Number

-14.0

Operating Profit

14.0

R&D Expenses
0.0

G&A Expenses

Royalty Expenses

0
0

M&D Expenses

Cost of sales

Gross Profit

2006

Forecasted Sales :

Year

Cash Flow Statement 950FX

P&L Statement ($ million)

-35.8

-21.8

0.91

-24.0

0.0

24.0

2007

-53.2

-17.4

0.83

-21.0

0.0

16.0

-5

2008

-48.9

4.2

0.75

5.6

0.0

6.0

4.365

5.82

21.825

7.3

29.1

2009

-32.6

16.3

0.68

23.9

2.0

1.0

10.08

13.44

50.4

16.8

67.2

2010

Exhibit 2
Cash Flow Analysis for the 950FX Project

-15.6

17.0

0.62

27.4

2.0

1.0

11.4

15.2

57

19.0

76

2011

1.8

17.4

0.56

30.8

2.0

1.0

12.7

16.9

63.45

21.2

84.6

2012

18.5

16.7

0.51

32.5

0.0

1.0

12.6

16.7

62.775

20.9

83.7

2013

35

97.0

65

65

87

319

113

433

Total :

06/2006-4572

35.2

16.7

0.47

35.8

0.0

1.0

13.8

18.4

69

23.0

92

2014

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Exhibit 3
Capacity Demands for Projects
Person Years (PYs)
Estimated by Development
Project

2006

2007

2008

2009

2010

2011

Total

Field Support

10

10

10

10

10

10

60

Small Releases

30

30

30

30

30

30

180

Mfg and Serviceability

40

40

40

40

20

MW500/700 Redesign

70

20

MW500LDowngrade

80

50

900X Upgrade

50

50

950 FX

70

120

80

3G Antenna Redesign

60

90

100

Streaming Server

90

90

90

802.16 Device

50

110

130

80

20

390

180
90

50

180
100
30

300
250
270

Total

410

550

510

330

140

60

1970

Capacity

300

300

300

300

300

300

1800

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Exhibit 4
Development Effort for Prior Projects

600

Effort (Person Years)

500
400
Overrun
Planned

300
200
100
0

Upgrade
500X

Development
500X

Development
700X

Development
900X

Project

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Revised Version 2006 INSEAD

06/2006-4572

696-025-1

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