AT&T: 20 Years of Change


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This presentation analyzes AT&T and its strategies since the early days of the telephone, passing by the divestiture of 1984, and ending in Michael Armstong's days. a SWOT analysis is performed in each of these milestones.

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AT&T: 20 Years of Change

  2. 2. Introduction: This is an interesting case of Strategic Management. It shows how dynamic the process of Strategic Management is. It demonstrates: Why visions change, How visions change, and theimpact of their change. It reveals the influence of external stakeholders on enterprisecompetitiveness. It demonstrates how visions affect the mission and action plan of anenterprise.
  3. 3. Contents: The Early Days (1876-1894). The Early Days (1894-1904). Theodore Vail’s Vision (1907). The FCC Duels (1934-1982). The Divestiture (1984). The Telecommunications Act (1996). The Re-structuring. Michael Armstrong’s vision(1997-2000). Failing Strategy.
  4. 4. The Early Days (1876-1894): 1876: Alexander Graham Bell invented the telephone and earned apatent. 1877: The Bell Telephone Company was formed. 1878-1894: The company provided Telephone services exclusively inthe United States through its licensees.
  5. 5. The Early Days (1876-1894):Opportunities Technological Factors: The invention of the Telephone provided a new untapped market withhuge growth potential. Legal Factors: The protection policy (patents) allowed the company to avoid earlycompetition. Economic Factors: Demand for the new service was booming.
  6. 6. The Early Days (1876-1894):Opportunities Market Analysis: The entry barrier was infinity due to the patent. Bargaining Power of Customers was Minimal, due to Bell being the onlyprovider .
  7. 7. The Early Days (1876-1894):Threats Threat of Potential Substitutes: Threat of Substitute Products: The only potential substitute was theTelegraph, provided by Western Union.
  8. 8. The Early Days (1876-1894):Strengths American Bell was the only company that have the technology andallowed legally to use it. The product was extremely differentiated.
  9. 9. The Early Days (1876-1894):Weaknesses The patent would expire in 1894. The telephone network still needed lots of investment in order toincrease coverage.
  10. 10. The Early Days (1876-1894):Business Definition Markets: Households, Business, and Government. Functions served: Communication among distant entities. Technologies Utilized: Harmonic Telegraphy using variable resistancein a liquid. Products/Services: Short Distance Voice Communications.
  11. 11. The Early Days (1876-1894):Strategic Implementation American Bell aimed at Creating a Monopoly to benefit from itslegal protection. Diffusing the technology through licensing to operating companies. Backward integration: Acquiring a majority in Western ElectricCompany (1882), creating the firm’s own manufacturing unit. Forward integration: Acquiring most of its licensees across the UnitedStates, resulting in the creation of the Bell System or ―Ma Bell‖. Entering the Long Distance service market by establishing AT&T.
  12. 12. The Early Days (1894-1904): Bell’s second patent expired on 30th January, 1894. Ma Bell was no longer the only company that could legally operatetelephone systems in the United States. Over 6000 new telephone companies (Operators andManufacturers) were established, called the Independents.
  13. 13. The Early Days (1894-1904): Stromberg-Carlson (1894) Kellogg SwitchBoard and Supply Company (1897) Automatic Electric Company (1901) Brown Telephone Company (1899)  Sprint Nextel
  14. 14. The Early Days (1894-1904):Opportunities Economic Factors: The market was still rapidly growing. The long distance market was still untouched. Technological Factors: Networks were not interconnected, meaning that subscribers todifferent telephone companies could not call each other.
  15. 15. The Early Days (1894-1904):Threats Legal Factors: The end of the patent protection. The company’s growth had been capped by the laws of Capitalizationof Massachusetts. Market Analysis: Competition was intensifying. Entry barriers were lower, resulting in increasing number of new entrants. People now had many options, raising the bargaining power ofcustomers.
  16. 16. The Early Days (1894-1904):Strengths The company owned the only long distance network. The companys much larger customer base made its service muchmore valuable. The company’s quality of service was better than its competitors.
  17. 17. The Early Days (1894-1904):Business Definition Markets: Households, Business, and Government. Functions served: Communication among distant entities. Technologies Utilized: Harmonic Telegraphy using variable resistancein a liquid. Products/Services: Short and Long Distance Voice Communications.
  18. 18. The Early Days (1894-1904):Strategic Implementation American Bell aimed at Enforcing its Monopoly over the market toreact to the intensifying competition. This led to hiring Theodore Vail as a CEO in 1907. He was a telephone industrialist. His philosophy of using closedsystems, centralized power, and as much network control aspossible, in order to maintain monopoly power, has beencalled Vailism.
  19. 19. “”One System,One Policy,Universal Service.Theodore Vail’s Vision (1907):
  20. 20. Theodore Vail’s Vision (1907): AT&T under Vail focused on Enforcing the Monopoly andCompeting with Innovation. The most important stakeholder: The government. He convinced President Woodrow Wilson that the telephone wouldspread more rapidly if brought under one monopoly so as to ensureuniform provision of services throughout the country. To avoid antitrust action, Vail agreed to the KingsburyCommitment of 1913.
  21. 21. Theodore Vail’s Vision (1907):The Kingsbury Commitment The government agreed not to pursue its case against AT&T as amonopolist, AT&T agreed to divest the controlling interest in the Western Uniontelegraph company, AT&T agreed not to acquire any more independent phonecompanies without the approval of the Interstate CommerceCommission. AT&T allowed independents to connect to its network.
  22. 22. Theodore Vail’s Vision (1907):Strategic Implementation Founding Bell Labs in 1925. The First Trans-Atlantic phone service began in 1926 (via two-wayradio). Inventing the Transistor in 1947. First Microwave Relay system was created in 1948
  23. 23. The FCC Duels (1934-1982): The FCC had been created by the Communications act of 1934,taking over regulation of communication from Interstate CommerceCommission. The Federal Communications Commission (FCC) regulated allservice across state lines, controlling the rates that companies couldcharge, and the specific services and equipment they could offer.
  24. 24. “”To make available, so far as possible, to allthe people of the United States a rapid,efficient, nationwide, and worldwide wireand radio communication service withadequate facilities at reasonable chargesThe FCC Duels (1934-1982):
  25. 25. The FCC Duels (1934-1982): The FCC filed an antitrust lawsuit against AT&T in 1949. In 1956, AT&T agreed to restrict its activities to the regulated businessof the national telephone system and government work.
  26. 26. The FCC Duels (1934-1982):Opportunities Economic Factors: Demand was still high. The penetration of telephone service into American householdsincreased from 50 percent in 1945 to 90 percent in 1969. Technological Factors: The transition to electronic components allowed more powerful and lessexpensive customer and network equipment. Rapid Development kept the market growing.
  27. 27. The FCC Duels (1934-1982):Threats Legal Factors: Change in regulations by the creation of the FCC in 1934. Antitrust case filed by the FCC in 1949. Regulations and Case Settlement of the case capped AT&T’s business.
  28. 28. The FCC Duels (1934-1982):Strengths Continuous development kept the company way ahead ofcompetition. The company still owned the largest coverage network. The company still had a monopoly on the long distance market.
  29. 29. The FCC Duels (1934-1982):Weaknesses Safety from competition created a negative effect on management’sculture. Managers saw profits as a way to support the monopoly, not an end initself. Cost control was ensured to satisfy regulatory overseers. Sales representatives were warned not to oversell, as customers weretaken for granted. Managers became risk averse.
  30. 30. The FCC Duels (1934-1982):Strategic Implementation Continuous Innovation, providing alternatives, and creating newrevenue generation mechanisms: Leasing Telephone equipment to users, instead of selling them ‖ BELLSYSTEM PROPERTY — NOT FOR SALE.‖. Invention of the microwave relay systems (an alternative to copperwires). First communications satellite in 1962, providing an additional alternativefor international communications. These provided alternatives for international communications.
  31. 31. The FCC Duels (1934-1982): 1971: The FCC opened private-line service to all competitors,allowing them to use AT&T technology, to allow more competition. The FCC filed another antitrust lawsuit against AT&T in 1974, believingthat a monopoly still existed for the local exchanges. 1982: AT&T agreed to divest itself of the wholly owned Bell OperatingCompanies (Baby Bells). In return, the government lifted restrictions of 1956.
  32. 32. The Divestiture (1984): The divestiture took place on January 1, 1984. The Bell System: AT&T and seven operating companies: Ameritech, acquired by SBC in 1999, now part of AT&T Inc. Bell Atlantic (now Verizon Communications), which acquired GTE in 2000. BellSouth, acquired by AT&T Inc. in 2006. NYNEX, acquired by Bell Atlantic in 1996, now part of VerizonCommunications. Pacific Telesis, acquired by SBC in 1997, now part of AT&T Inc. Southwestern Bell (later SBC, now AT&T Inc.), which acquired AT&T Corp. in2005. US West, acquired by Qwest in 2000, which in turn was acquiredby CenturyLink in 2011.
  33. 33. The Divestiture (1984): AT&T retained $34 billion of the $149.5 billion in assets and 373,000 ofits previous 1,009,000 employees. The Bell Logo had been given to the RBOCs.
  34. 34. The Divestiture (1984):Business Definition Markets: Households, Business, and Government. Functions served: Communication among distant entities. Technologies Utilized: Improved Telephony and AutomaticSwitching. Products/Services: Long Distance Voice Communications.
  35. 35. The Divestiture (1984):Opportunities AT&T was no longer restricted to the regulated business of NationalTelephone and Government Work. The company continued generating enormous positive cash flowsalthough it was steadily losing market share.
  36. 36. The Divestiture (1984):Threats Legal Forces: The imposed divestiture stripped AT&T from its competitive position. Economical Forces: AT&T’s long distance market share dropped from 90% (1984) to 50%(1996). Technological Forces: The company had to keep up with emerging technologies, such as fiberoptic transmission.
  37. 37. The Divestiture (1984):Threats Market Analysis: Competition had been intensifying in all of AT&T’s portfolio. The end of AT&T’s regulated monopoly over the Telephone industry. Availability of substitutes for AT&T’s manufacturing operations (AT&TNetwork Systems).
  38. 38. The Divestiture (1984):Strengths The company still owned great technology, provided by the famousBell Labs. The company could still rely on personnel strength.
  39. 39. The Divestiture (1984):Weaknesses AT&T became a firm without a local network into offices and homes. AT&T lost its ability to reach almost every consumer in the UnitedStates by its wires and bills. The ―last mile‖ would be controlled bythe RBOCs. Corporate culture needed re-invention to match the newcompetitive environment.
  40. 40. The Divestiture (1984):Strategic Implementation AT&T negotiated agreements with the RBOCs to lease parts of theirnetworks and resell the service to its own customers. AT&T was lobbying state regulators to break the regional Bells intotwo companies: One that would sell services like dial tone and DSL,and another that would lease the network to both competitors andto the incumbent local phone company. Given the high fees for leased access, the company decided tofind an alternative. The options were Fixed Wireless Technology andCable TV lines.
  41. 41. The Divestiture (1984):Strategic Implementation AT&T aimed at Diversifying Business, Seeking Alternatives andRelying on Convergence. AT&T saw the convergence of communications and computingindustries. AT&T tried to link the different businesses to gain synergies. 1991: Acquiring Computer maker NCR for $7.4 billion. 1994: Acquiring McCaw Cellular, the US leader in wireless businessfor $11.5 billion.
  42. 42. The Divestiture (1984):Strategic Implementation AT&T gained direct access to consumers for the first time in adecade.
  43. 43. The Telecommunications Act (1996): According to the FCC, the goal of the law was to "let anyone enterany communications business – to let any communications businesscompete in any market against any other.― Allowed the RBOCs and other competitors to compete in the longdistance service.
  44. 44. The Telecommunications Act (1996):Opportunities The Wireless Communications industry, as well as the computerindustry, had been fiercely growing and becoming global.
  45. 45. The Telecommunications Act (1996):Threats Increased pressure on AT&T, Sprint, MCI-WorldCom, and otherplayers in the market. The former RBOCs: Verizon Communications, SBC CommunicationsInc., Qwest Communications International Inc., and BellSouth Corp.,became the strategically best positioned telecommunications firmsin the United States. The changing telecom environment and increasing deregulationmade the market more complex. The new telecom competitors, including cable firms, RBOCs, andmobile service companies, had many options from whom to buytheir equipment.
  46. 46. The Telecommunications Act (1996):Strengths AT&T was still the leading force in the fast growing wirelesstelecommunications market. AT&T also was the biggest cable provider in the United States.
  47. 47. The Telecommunications Act (1996):Weaknesses The absence of synergies across AT&T’s businesses. The computer subsidiary was suffering from mounting losses ($5.9billion in 3 years). Corporate culture clash resulted in confusion, complacency, andloss of direction. The commitment to become one of the world’s top three PCmakers resulted in a product line and an expense structure that wasout of line with market demand.
  48. 48. The Telecommunications Act (1996):Weaknesses The equipment department failed to attract many customers ascompetitors feared that AT&T would see their plans and use theprofits to act against them.
  49. 49. The Telecommunications Act (1996):Strategic Implementation AT&T decided to spin-off its computer division, its telecom network,switching and transmission equipment business, as well as thefamous Bell Labs. This led to a voluntary divestiture.
  50. 50. The Restructuring: Restructuring of AT&T into three companies: a systems andequipment company (which became lucent Technologies), acomputer company (NCR), and a communications servicescompany (which remained AT&T). After the spin-off of Lucent, Lucent was able to win contracts itwould probably never have won when it was part of AT&T.
  51. 51. “”Transforming AT&T from a long distancecompany to an ―any-distance‖ company. Froma company that handles mostly voice calls to acompany that connects you to information inany form that is useful to you. From a primarilydomestic company to a global companyMichael Armstrong (1997-2000):
  52. 52. Michael Armstrong (1997-2000):Opportunities Data Communications was growing rapidly. New trends like video telephony, VOIP, and Video Over IP weregaining popularity. The Wireless Communications market continued growing.
  53. 53. Michael Armstrong (1997-2000):Threats Market Analysis: AT&T was under the mercy of its competitors. It had to succeed innegotiations with other cable operators to achieve its goal of offeringbranded telephony coverage to at least 60 percent of US homes. The long distance business (AT&T’s major business) was shrinking quickly. Technological Forces: Providing these services over cables was still in theoretical stages.Practically it had never been demonstrated.
  54. 54. Michael Armstrong (1997-2000):Threats Legal Forces: The FCC accepted AT&T’s plans provided that the company acceptsone of three choices: Divest MediaOne’s 25 percent stake in Time Warner Entertainment. Sell Liberty Media Group, a minority stake in Rainbow Media Holdings Inc.and MediaOne’s programming networks. Sell 9.7 million cable subscribers, which was more than half of the company’scurrent subscribers. Economic Forces: The necessary acquisitions will load AT&T with too much debt.
  55. 55. Michael Armstrong (1997-2000):Strengths AT&T had the required financial status to achieve the requiredupgrades. AT&T had the necessary technical knowledge to upgrade itsnetwork. AT&T was the largest cable and wireless network operator in thecountry.
  56. 56. Michael Armstrong (1997-2000):Weaknesses AT&T Cable Systems were far from supporting the requiredbandwidth for these services. AT&T was under the mercy of its competitors. It had to succeed innegotiations with other cable operators to achieve its goal ofoffering branded telephony coverage to at least 60 percent of UShomes. Lack of entrepreneurial spirit within AT&T and the clash of culturescan affect the employees of newly acquired companies.
  57. 57. Michael Armstrong (1997-2000):Business Definition Markets: Households, Business, and Government. Functions served: Voice, Data, and Video Communications. Technologies Utilized: VOIP, Video Over IP, Internet Technologies. Products/Services: Internet Services, Voice Services, Media Services.
  58. 58. Michael Armstrong (1997-2000):Strategic Implementation AT&T began to implement the vision of a global company byintegrating the cable, wireless, and long distance businesses. It took cost-cutting measures to make AT&T the low-cost provider inthe communications industry by cutting the workforce in its longdistance business by 15,000 to 18,000 people over the following twoyears and by offering a voluntary retirement program for managers. AT&T initiated a series of joint ventures and acquisitions.
  59. 59. Michael Armstrong (1997-2000):Strategic Implementation The goal was to broaden the company’s scope to areas such asdata networking services, digital voice encryption, broadbandcable telephony, and video telephony. The other goal was to increase AT&T’s global reach. 1998: AT&T acquired Teleport Communications Group (TCG) for$11.5 billion. TCG was the leading local telecommunications serviceprovider for business customers in the United States.
  60. 60. Michael Armstrong (1997-2000):Strategic Implementation It provided networks that were an alternative to those of the RBOCsand allowed AT&T to save tens of millions of dollars in accesscharges previously paid to connect its customers to the Baby Bells’networks. It was to provide AT&T with the ability to offer high speed service tobusinesses in major US urban areas. It allowed AT&T to provide customers with a completecommunications solution by integrating TCG’s local services withAT&T end to end telecommunication services packages for businesscustomers.
  61. 61. Michael Armstrong (1997-2000):Strategic Implementation In 1999 AT&T acquired Telecommunications Inc (TCI), the secondlargest cable company in the United States, for $55 billion. Next, AT&T completed an acquisition of MediaOne, a cableoperator, for $56 billion cash and stock transaction. The two acquisitions made AT&T the leading cable televisionoperator in the US. The acquisition of cable internet and TV servicesled to the creation of AT&Y’s newest division: AT&T broadband andInternet services.
  62. 62. Michael Armstrong (1997-2000):Failing Strategy The reality of creating the vision was much more difficult thanArmstrong anticipated. AT&T invested $115 billion to achieve Armstrong’s vision. By 2001, AT&T was only able to upgrade 65 percent of the cablelines within its cable network, which matched only about one-fourthof AT&T’s 60 million total customer base.
  63. 63. Michael Armstrong (1997-2000):Failing Strategy Had the firm waited, newer internet technologies would havesubstantially lowered the upgrade cost. AT&T was spending about$1200 to add a phone subscriber to the cable network. By 2001,new technologies had lowered the cost of converting cable toallow phone service to about $700 per subscriber. In addition, AT&T did not succeed in striking a deal with other cableoperators to lease their lines, which was necessary in order tobroaden AT&T’s cable telephony customer base. (e.g.: TimeWarner)
  64. 64. Michael Armstrong (1997-2000):Failing Strategy The company also had not succeeded in entering local phoneservice competition with the RBOCs. The acquisitions left the company with $64 billion in debt, makingAT&T one of the industry’s most indebted companies and affectingits stock. AT&T also failed to promote its ISP business (WorldNet) in front ofAOL.
  65. 65. Michael Armstrong (1997-2000):Failing Strategy October 2000: AT&T announced a restructuring plan to break thecompany into separate Wireless, Broadband, Business LongDistance, and Consumer Long Distance companies. Restructuring aimed at attracting new investors and provide cash toreduce the enormous debt load. AT&T announced that it would sell non-strategic assets.
  66. 66. Michael Armstrong (1997-2000):Failing Strategy
  67. 67. Questions