International Corporate Strategy in Network Based Industries: A Case Study for the Emerging Multimedia Industry

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Tilburg University

International Corporate Strategy in Network Based Industries

Fladung, M.

Publication date:

2004

Document Version

Publisher's PDF, also known as Version of record

Link to publication in Tilburg University Research Portal

Citation for published version (APA):

Fladung, M. (2004). International Corporate Strategy in Network Based Industries: A Case Study for the

Emerging Multimedia Industry. [n.n.].

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INTERNATIONAL CORPORATE

STRATEGY

IN

NETWORK BASED

INDUSTRIES

ACASESTUDY FOR THEEMERGINGMULTIMEDIAINDUSTRY

Proefschrift_{ter verkrijging van de graad van doctor aan de Universiteit van Tilburg,} op gezag van de rector magnificus, prof. dr. FA. van der Duyn Schouten

in_{het openbaar te verdedigen ten overstaan van een door het college}voorpromoties aangewezen commissie in de Ruth First zaal van de Universiteit op vrijdag 30januari 2004 om 14.15 uur door

Michael

_Fladung

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Cover design by Stefan Wagner

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...

UNIVERSITEIT * * VAN TILBURG

...

BIBLIOTHEEK

INTERNATIONAL CORPORAT TRATEGY

IN

NETWORK

BASED INDUSTRIES

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Table

of

MULTIMEDIA

INDUSTRYFRAMEWORK 133

INTRODUCTION: PROBLEMS IN THE INTERNATIONALCORPORATE

STRATEGY PROCESS...134

4 INTERNATIONAL MULTIMEDIAACTIVITIFR 137 4.1 DECONSTRUCTION OFTHE"VALUECHAIN"... ...139

4.2 CORPORATEACTIVITY LEVFI 142 4.2.1 Empiricalreasoning... .142

4.2.2 _{Regulatory perspective.} .143 4.2.3 Graphicalpresentation ofthe corporate multimediaactivities.. .144

4.3 GEOGRAPHICALSCOPE OFTHE MULTIMEDIAACIWITIES...146

4.3.1 Globalisationpotential. ... . 146

4.3.2 The dynamicsofnetwork-based business... .... ... ... . 148

4.3.2.1 Zeroconcentration.. .148

4.3.2.2 Lane concentration. ... . 149

4.3.2.3 Zone concentration... ... ... .150

4.4 GLOBALISATION PO'rEN'r[ALOFTHE MULTIMEDIAACTIFTIES... 151

4.4.1.1 Terminalvending... .152

4.4.1.2 Contentoriginating... ... .... ... ...155

4.4.1.3 Content&servicepackaging... ... ... .158

4.4.1.4 Serviceprovisioning... ... ... ... ... .160

4.4.1.5 Infrastructureprovisioning... .... ...162

4.5 ACITVITYFRAMEWORK FORTHE MULTIMEDIAINDUSTRY... 164

5 MULTIMEDIA INDUSTRYORGANISATION 167 5.1 STRATEGY UNDERUNCERTAINTY. 169 5.2 SCENARIOPLANNING...173

5.2.1 _{Step 4: Rank}byimportanceanduncertainty... ... .176

5.2.2 Step5:Selecting scenariologics... ... ... .179

5.2.3 Step6:Fleshingoutthescenarios... .... ... ... ...180

5.3 DEVELOPINGMULTIMEDIANDUSTRY SCENARIOS...182

5.3.1 Multimediadriving forces. .183 5.3.2 _{Application of the}extendedimpact/uncertaintymatrix.. .185

5.3.3 Selectingscenariologic. .188 5.3.4 Multimediascenarios... .... .... .190

5.3.4.1 Multimediascenario 1:TheNoVodaWaandETeBecountries... .192

5.3.4.2 Multimedia scenario2:GlobalAnyweb.. .193

5.3.4.3 Multimediascenario 3:TheOrchid Net.. ... . 194

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PART MI: IMPLICATIONS FORTHE INTERNATIONALCORPORATE

STRATEGY 197

6 INTERNATIONALCORPORATESTRATEGY INTHE EMERGING

MULTIMEDIA INDUSTRY 198

6.1 IMPLICATIONS OF THE SCENARIOSFOR THECORPORATE STRATEGY...199

6.2 SMALUMEDIUMTELECOM OPERAIORINTHE"GLOBALANYWEB"SCENAR10... 201

6.2.1 _{Positioning in}themultimediaactivity framework . ... ... ...202

6.2.2 Activities with high globalisation potential.... ... ...204

6.2.3 Activities with high national differentiation needs. ... ... ...205

6.2.4 Activities out of the current telecom operator scope.. ... ...207

6.2.5 Integrating thetechnologytrends inthecorporatestrategy. ...209

6.2.6 Conclusion-International strategy forthesmall/medium telecom operator in the "Global Anyweb"scenario. ... ...211

6.3 MAPPING MULTIMEDIA PARTICIPANTS WITHTHESCENARIOS... 212

6.3.1 Small/mediumtelecomoperator intheNoVodaWascenario. ...213

6.3.2 Small/mediumtelecomoperator intheOrchidNet scenario.. ...214

6.3.3 Large telecomoperators in theNoVodaWascenario.. ...215

6.3.4 Large telecomoperator in theGlobalAnywebscenario ...217

6.3.5 Large telecomoperator in theOrchidNetscenario... ... ...218

6.3.6 Other multimediaparticipants inthe scenariologic... ...219

6.3.7 Other multimediaparticipants inthe OrchidNetscenario.. ... ...220

6.3.8 Conclusion-_multimedia participants inthescenariologic.. ... ... ...221

6.4 SELECTION OF LEADING INDICATORS AND SIGNPOSTS ... 222

6.5 CONCLUSION-INTERNATIONALCORPORATE STRATEGYINTHEMULTIMEDIAINDUSTRY.... 774 7 REFLECT[ONAND CONTRIBUT[ON 997 7.1 A NEWAPPROACH TOINTERNATIONALCORPORATE STRATEGY... 228

7.1.1 Thenewinternationalcorporatestrategyprocess... ... ... 230

7.1.2 _{Comparison of}theconcepts... ... 232

7.2 APPLICATION IN OTHER NETWORK-BASED INDUSTRIES... 233

7.2.1 Thepowersupplyarena... ... ... ..234

7.2.2 Internationalutilityactivities.. .... ... ..235

7.2.3 Utilityindustryorganizationandinternational_corporatestrategy ... 237

7.2.4 Conclusion... ... ... 238

7.3 OUT! nOK 779 8 APPENDIX 941 8.1 A PENDIX-TELECOMDEE[NmONS...242

8.2 APPENDIX-SWISSCOMCOMPANY_{PROFIT F} 747 8.3 APPENDIX -TOGEWANEr- TWO WAY INTERCONNECrION...248

8A APPENDIX-UNIVERSALSERVICE... 249

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List

_{of figures}

Figure1:Integrationoftheoretical concepts intothe strategy process...7

Figure2: Structure of the book... 9

Figure 3:Thefirsttwopages ofthe patentfrom AlexanderGraham Bell. ... ...13

Figure 4:ThefirSt telephone system... 14

Figure 5: Spreadoftelephoneservice, 1880-1920... ... ...19

Figure6:Growthoftelephoneinstallations...20

Figure 7: Top10public telecommunicationoperators...24

Figure 8:Asimplified viewofprocesses used byaservice_provider .29 Figure9:Swisscom international holdings... ... .... ...34

Figure10:_{Telekommunikationsgesetz § 111.} 46 Figure11:Steps towards deregulation...52

Figure12:AcccesstypeSforinterconnection. 79 Figure13:_{Fixed-Telephony operators}inAuft·ri. 76

Figure14:_{Incumbent operator market}share...77

Figure15:Integrating policy trendsintodynamic advantage... ...85

Figure16:Industrytrends... 94

Figure 17:Thestagesofconvergenrp 97

Figure18:Turnover intheconverging IT,telecom andbroadcastingsectors ...99

Figure19:_{I.ncation of the ma or}players in the value chain andrelationshipbetween them... 100

Figure 20: Theemergingvalue chain... 101

Figure 21: Thestagesofconvergence. 103 Figure 22:The emergingvalue chain...103

Figure23:Industryglobalization potential...113

Figure 24: Key global telecom indicators fortheworldtelecommunication service sector... 114

Figure25:StockpricesforI.evel 3 and Qwest... ...121

Figure 26:The emergingvaluechain... 137

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Figure 33:The anatomy ofatransnational-Content&service packaging...159

Figure 34:The anatomy ofatransnational-Service provisioning...161

Figure 35: The anatomy ofatransnational-Infrastructureprovisioning...163

Figure36:Globalisation potential intheindividualactivities...165

Figure 37: Theactivity framework forthemultimediaindustry...166

Figure38:Levelofuncertainty... ... ...170

Figure 39: How to use the fourlevelsofuncertainn·...171

Figure40:Impact/Uncertainty matrix. ... ...177

Figure41:Extendedimpact/uncertaintymatrix ... ...178

Figure42:Industrytrends... .... .183

Figure43:Positioning of trends... .... Figure 44: Scenario logic of the multimedia industry organisation... ...189

Figure 45:Themultimedia industry organisationscenarios... .... ...191

Figure 46:Themultimedia industry organisationscenarios. 195 Figure 47: Positionaclassictelecomoperator in the multimedia activityframework... ...202

Figure48:Activitieswith high globalisationpotential-Service provisioning... ...204

Figure49:Activities with high national differentiationneeds-content&_{service packaging...206}

Figure50:Activities out ofthecurrenttelecomoperators scope-content...208

Figure51:Positioningoftrends... ... ... ... ...209

Figure 52:Thestrategicoptions.. ... ... ...212

Figure53:_{Recommended strategic}_options. ... .... ...221

Figure54:Development of the scenarios. ...222

Figure55:Recommended strategic options... ... ...224

Figure56:Industry globalisation potential. ...228

Figure57:Integrationoftheoreticalconcepts intothe strategyprocess... ...231

Figure58:Comparison oftheglobalisationpotential analysis with the new framework...232

Figure 59:The powersupply value chain... 234

Figure 60:The anatomy ofatransnational-Utility industn'...235

...256

Figure 61:Thevalue chain. Figure62:Value system... ... 957

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List

_{of figures}

Figure1:Integrationoftheoreticalconcepts intothe strategyprocess.. 7

Figure2:Structure of the book... ...9

Figure 3:The firsttwopages ofthepatentfromAlexanderGraham Bell.... 13

Figure 4:Thefirst telephonesystem...14

Figure5:Spreadoftelephone service,1880-1970 19

Figure6:Growthoftelephoneinstallations...20

Figure 7: Top10public telecommunicationoperators...24

Figure 8:Asimplified viewofprocesses used by a service provider...29

Figure9:Swisscominternationalholdings... Figure10:Telekommunikationsgesetz § 111 46

Figure11:Stepstowardsderegulation...52

Figure12:Acccess types for interconnection...72

Figure13:_{Fixed-Telephony operators in}Austria ...76

Figure 14: Incumbent operator marketshare...77

Figure15:Integrating policy trends into dynamicadvantage...85

Figure16:IndustrytrenA 94

Figure 17:Thestagesofconvergence... 97

Figure18:Turnover intheconverging IT, telecomandbroadcastingsectors ...99

Figure19:Incation of themajorplayers in the value chain andrelationshipbetween them... 100

Figure 20:The emergingvaluechain... 101

Figure 21:Thestagesofconvergence... 103

Figure 22:The emergingvaluechain...,..,,... ...,...,... ...,...,... 103

Figure 23:Industry globalizationpotential... 113

Figure 24:Key global telecom indicators fortheworld telecommunicationservice sector... 114

Figure 25:Stockprices for kvel 3 and Qwest... 121

Figure 26:Theemerging value chain... 137

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Introduction

There weretworeasons that led me to conduct research onthe topicofinternational

corporate strategy amidst an uncertain organisational structure within the

telecommunications industry. First,my professionas_{business development manager} and_{consultant demand an extensive knowledge about the ongoing}_changes within

the industry. Secondly, my MBA curriculum, particularly the course about

international marketing, provided valuableinsights intothe topic,butincreased my

appetite foradditionalknowledge.

In 1997, as_{business development manager at Unisource,} adivisionof Swiss PIT, I

had the opportunity to define the division's international _expansion strategy for

entering Austria. Simultaneously, I attended Professor Philippe Naert's marketing

strategy course through the University of Bern's MBA Program. He presented

several interesting strategy concepts and asked the course participants to write a

case study as our final exam. My case study

dealt with

the issue ofUnisource's

entrance into theAustrian market, specifically an analysis oftelecommunications

activities anda definition ofaninternational strategyto expanda company's value chaininternationally.

Both thecase _{study and} _my business development work were successful, that is, I

succeeded in my marketing case and the company implemented its expansion strategy.However,thisstrategy proved tobeunsustainable.

From an _{academic perspective, my} marketing case applied various globalisation

methodologies. However, the chosen methodologies raised several new issues that

could notbeaddressedwithinthescope ofa_{marketing case,} forexample, theimpact

of _convergence, _upcoming _{deregulation, and} _{new technologies upon the} industry

landscape, the entranceof competitors into theAustrian market andtheirstrategic approach, and theimplications ofthesedevelopments for Unisource's strategy. The Unisource division in which I worked was eventually re-integrated into Swiss

PTT. At the same time, Swiss FITwentthroughareorganisation and renamed its

telecomunitSwisscom. Thestrategy thatwasoriginallyapproved by Unisource was

stillbacked by senior management, butwas_{implemented under the name}Swisscom.

Swisscom's

first

subsidiary, SwisscomAustria,existed for only one year before it was integrated into a newjoint venturebetween UTA andSwisscomin Austria. This joint

venture has now been divested and Swisscom is _currently conducting acquisition

talkswithTelekomAustria.

All

ofthesedevelopments occurredwithin a time span ofsixyears.My motivation for

writing this bookis,based upon my ownexperiences, toassist managersindefining a

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Strategic question

Until 1998, thetelecomindustry

in

Europewasclearly defined and characterised by national verticallyintegrated monopoliesthatprovided telephony and leased

line services. Historically, telecom operators were often anintegral part of the

national postal operator. Following deregulation inmost European countries in

1998, telecom operators facedmanychanges

within

the industry.

At that time, new players like AOL, Colt, MCI, Qwest, Level 3 and Yahoo were

emerging. For some of the new entrants, the second development stage with

mergersandacquisitionshas _{already taken} _place._{A well-known example in the}

press was theVodafone andMannesmann takeoverbattle in2000. Furthermore, the scope of telecom operators has been extended into other areas through

mergers with computer companies or media services, as in the case of Olivetti,

which boughtTelecomItalia in 1999.

The rules of thegame remain unclear toall participants. Uncertainty about the

best strategic move and the future structure ofthe industry can also be drawn from the extremely volatile stock market development ofincumbents' and new

entrants'shares.

Telecomoperators who were _formerlymonopolyoperators have lost partoftheir

100% marketshare in their nationallyprotected market.Toreact tothischange,

these telecom operatorshaveattemptedtoexpand thescopeoftheirbusiness, for which entering new geographical markets is one of the strategic options.

These industry changes also set the stage for Swisscom, the former monopoly

telecom operatorinSwitzerland. Swisscom wasunder thesamepressureasother European telecom operators, in that deregulation enabled competitors to enter

their formerly protected home market. Consequently, Swisscom considered the

entrance into

the Austrian telecommunications

market as one

of their

international_{extension strategies.}

The research for Swisscom's entrance into the Austrian telecommunications

marketdefinesthe empirical question that is the subject of thisbook,namely:

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What are the nature and problems of vertically integrated incumbent telecom

operators?

Howdoes_{deregulation affect the}_industry?

What is the globalisationpotential inthe telecommunications industry?

Whatother trendsare_{reshaping the}_industry?

The answertothesequestions provides the basis for the strategicdiscussion. Intense research wasconducted on_{the emerging}multimediaindustry, includingthe nature of the telecom arena, the economics of network based industries and the ongoing

trends in_{the industry.}

This research led totherealization that a highdegreeof uncertaintyexistsabout the

future of the industry's organisation. Merger and de-merger activities, as well as

several failed strategicmoves on the part oftelecom operators, provide evidence of

the uncertaintywithintheindustry (VodafoneMannesmann, Global Crossing, AOL

Warner, AT&T Unisource, KPN Qwest, Level 3). The uncertainties involved in

dealing with the future _{demand the application} of _{appropriate methodologies and}

concepts.

The internationalcorporate strategyprocess wascarried out through all phases to

makethe _{described concepts}_{plausible and provide}_integrated answers tothe above

questions. Theories about the economics ofnetwork business, globalisation and

handling uncertaintysupportedthisprocess.

This conceptual basis created the framework for the book. Numerous discussions

with industryexperts and myconsulting work inthe_{industry further}developed the

framework_{and stabilised the argumentation. The} _process _{of defining} international

corporate strategy in an uncertain industry environment is applied to several

concrete_{examples that}_{give specific}answers to theabove questions.

It is hoped that the _{concepts and} _strategic advice _{developed in} this thesis make

substantial contributions to managerial practice and the academic

field of

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International

_Corporate

_Strategy

The title of one of Michael Porter's publications (Porter 1996) is What is strateg.2 It is alsoa_{pertinent question}related to thisbook. Porter has the following tosayabout

corporate strategy:

"Corporate strategy, the overall plan for a diversified company, is both the darling and the stepchild of contemporary management practice" (Porter

1987:43).

Accordingto Porter, corporate strategy issimultaneously a 'darling', as CEOs have

been obsessedwith diversification, anda'stepchild', since noconsensusexistsabout

whatcorporate strategy is or how toformulate it.Other authorsagree that the term

corporatestrategy is not clearly defined. Consequently, theyprefer to formulate the purpose ofcorporate strategy as a _question _(Mintzberg 1998, Porter 1980, Grant 1998). This chapter

will

first define the usage of the term corporate strategy and

then integrate theissuesofinternationalstrategy.

'Next comes the question of what strategies of a generic nature are available to extend and reconceive that core business. These are approaches designed to

answer the corporate level question, "What business should we be in?"

(Mintzberg 1998:347)

Instead ofdefining the term corporate strategy, Mintzberg investigates what the scope of the corporation should be. He then goes a stepfurtherand points out the

existenceofverticalandhorizontal strategic paths.

"Strategies designed to take organizations beyond their core business can be pursued in so-called vertical or horizontal ways, as well as combinations of the two." (Mintzberg 1998:347)

Porter and Grant both agree that corporate strategy should answer the question

"what business should we be in?". In addition, Porter considers the role of the

corporateoffice.

"Corporate strategy concerns two different questions: what businesses the

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V

"Corporate strategy defines the scope of the firm in terms of the industries and

markets in which it competes. Corporate strategy decisions include

investment in diversification, vertical integration, acquisitions, and new

ventures, the allocation of resources between the different businesses of the firm; and divestments."(Grant 1998:19)

The second field _{of strategic management} is called "business _{strategy" or}

"competitive strategy". Business strategy supports the managerial process in the

positioning ofafirm's_{scope in}the market.

Business strategy is concerned with how the firm competes within a particular

industzy or market. If the firm is to prosper within an industrs it must

establish a competitive advantage over its rivals. Hence, this area of strategy is also referred to as competitive strategy (Grand 1998:19)

The focus of this bookis corporate strategy. Businessstrategy, on theother hand, is

setwithregards toafirm'schosenposition.

The international aspect ofcorporate strategy is pertinent to the question "what

business should we be in?".Thisquestion includes both thescope ofthe corporation

as well as

its geographical perspective. Existing literature provides structured

approaches about how to analyse the industry and define international strategy

(Porter 1985, Yip 1992, Bartlett 1998). George S.Yip, one of theleading researchers

in international _strategy, _provides _generic _{strategy levers for expanding} a firm's

business_{internationally.}

"Globalisation strategy is multidimensional. Setting strategy for a worldwide business requires choices along a number of strategic dimensions. Some of these dimensions determine whether the strategy lies toward the multilocal

end of the continuum or the global end. "(Yip1992:15)

Yip specifies the dimensions forall elementsofinternational strategy. _{However, he}

doesnotdifferentiate_{between corporate and business strategy In fact, few authors of}

international strategydifferentiatebetween the two levels. Instead, theyfocustheir

discussionofinternational_{strategy on the business level. The main}focusofexisting

literature is the implementation ofinternational strategy in the current business

context (Hame]/Prahalad 1989,Bartlett/Ghoshal 1998, Quelch/Hoff 1986). This book applies some of theinternationalstrategy conceptsinorder to answerthe previously

posedstrategic question(Bartlett/Ghoshal1998/ Coyne 1998).

The_{fundamental reorganisation of the}_{industry after}_{deregulation (c.f. Part I) pose a} challengeindefining thescope ofatelecom operator'scorporate strategyprocess. Of

particular interest istheintegration oftheinternational aspect at thebeginning of

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V

A definition of international _{corporate strategy} needs to address the following

questions:

- Whatinternationalbusinessshould_{the corporation be in?}

- How should the corporationbestructuredto_managethisbusiness? - How doesthe corporationget there?

The strategic questionhasshownthattelecommunicationsoperators havesignificant

problemsindefiningtheir internationalcorporate strategy. Therefore, thefinal title,

incorporating both the developments

within

the telecommunications industry, and

international corporatestrategy, is:

InternationalCorporate Strategy

in

NetworkBasedIndustries

- Acase_{study for the Emerging}_{Multimedia Industry}

Asthetitle implies, the main topic of this bookisinternationalcorporatestrategy in

the multimedia industry. However, during the industry analysis phase, itbecame

clear thattheprimaryissueininternationalstrategy is theuncertainty inthefuture

organisation of the industry. The goal of achieving sustainable guidelines in the

strategy process requires placing an emphasis on globalisation potential in the

multimedia industry and the uncertainty of the future organisation within the

industry.

The answer to _{the strategic question} is presented in several steps. The first step

(Part I) in the process is the definition of the industry arena, the underlying

economics and the analysis of industry trends based on current literature and

management workshops. The second step defines the problems and potential

solutions, and is themaintopic of part II of this book. The final stepcombines the

analysis of part I andthesolutions of part II intothe corporate strategy process for

guidelines in theinternationalcorporate strategy.

From an academic viewpoint, the book delivers a complex, but real case,

in

which theorymeetspractice. From apracticalviewpoint, the framework canbe applied in defining strategies that are more sustainable than those currently implemented

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Methodology

The currenttrendtowards deregulationcreates ahighlevel ofuncertaintyabout

the future organisation

within

network-based industries.

However, the

integration of industryknowledgewiththeoretical_conceptshelps to overcome the

challengesrelated to the uncertainty and makeacompany'sstrategic moves more sustainable.

The methodology chosen for this bookis aligned with managerial practice. The book followsthecorporate strategy processfromindustryanalysis, then toafocus

on specific problems, and lastly, strategic advice. The conceptual base is

integrated intotheprocessatthose stages whereit_{strengthens the reasoning or}

provides tools for overcoming specific problems. Consequently, this approach contributes toacademictheorybuilding throughthe application andintegration of

currentconceptualtools,_{and benefits both managerial and consulting practice.}

The diagram below showsthe interactionbetweenthe strategy process, industry

trends andtheconceptual base.

Figure1:

_{Integration of}

theoreticalconcepts intothe strategyprocess

Strategy Process m

E Deregulation Industry Activity Globalisation Industry & Analysis Framework Potential Scenarios

E Convergence International

8 corporate

Globalisation Strategy

H + 4 7

Technology 1

Conceptual Base Economicsin Global Strategy Uncertainty in Telecommunications Industry Regulation Organisation

Theindustryanalysis shows that thefuturetelecomarena will be anintegrated part

of the emerging multimedia industry. At the same time, the current managerial

perspective of a telecom operator is maintained in the argumentation, and is

supported bypractical examples,based_{upon personal experience in the}international

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Structure of the book

The research areas covered in this book span a wide area with different

methodologies, periods andlevels ofdetail. The bookis organisedinthreeparts

that cover the overallstrategy process. Figure 2provides a graphical overview of the structure.

Part I contains thegenericindustry analysis withtwo goals,namely to:

1. providethe background of the industry, and to

2. define thenature ofthe problem in thestrategy process

Chapter 1 covers the results ofa literature _{search on the history, organisation and} regulatory developments of the classical telecommunications industry.

Chapter2 looks at the_{specific economics}involvedin networkbasedindustries, from

the reasoning behind natural monopolies to the economics of deregulation, contestabilitytheory,infrastructurecharacteristics andnetworkexternalities.

Chapter 3 looks at the trends reshaping the current telecommunications industry.

The important trends analysed are convergence, technology, globalisation and the

changes in industry structure. An important issue covered in this chapter is the changein focus fromthe telecom to themultimedia industry duetoongoingindustry

changes.

Part IIisbased onthe results of Part I. Toovercomethe problems in the strategy

process, analyticaltoolsare selected_{and applied}tocreatean_industryframework as part of theindustryanalysis.Two_primarytopicsare covered,namely the:

1. logicof globalisation in themultimediaindustry, and

2. dealing withtheuncertainty in industryorganisation

Chapter 4 contains the problem statement for the globalisation aspects in the

multimedia industry The underlying conceptual base is used to solve the stated

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Chapter6shifts the focus from theindustry tothe corporation. The elements of the industry analysis and the multimedia industry framework are tied together to show howthose componentsinteract inthecorporate strategy process.

Chapter7returns to the original strategic question and providesanoverview of how

different theoretical concepts support the international corporate strategy process,

and how the framework developed can be transferred to other industries like the

utilityandtransportationindustries.

Figure2: Structure of the book

Strategic Question

Q Economics in @ @

Trends in the

Part I The Telecom Arena Network Based

Industries Telecom Arena -PTT's -Monopoly - Convergence - ClassicTelecom -Deregulation - Globalisation - InternationalDeregulation -Contestability -Industry Structure

-_{Future Regulation} -Infrastructurecharacteristics - Technology

4

Problems inthe_{International Corporate Strategy}

0 ®

Part 11

International Multimedia Industry Multimedia Activties Organisation - Deconstructionof ValueChains - Uncertainty -_{Geographical Scope} -_{Scenario Planning} -Globalisation Potential -Multimedia Industry Scenarios

-_{Multimedia Activity Framewom} 4

Implications for the InternationalCorporate Strategy

® ®

Part Ill International Reflection and

CorporateStrategy Contribution

Implications - Comparisonof Strategy Concepts .Global Anyweb Activities - Applicationinother Network Based Industries

-_{Mapping Multimedia}_Participants - Outlook -Integrating Technology

Theinternational corporatestrategyprocess is carried out onthebasisofexamples

from thefirst step ofthe analysis to the pointwhereconcrete strategystatements can be formed. The book asa whole isacombination ofeconomic concepts and business

theory andmethodologiescomplemented by empirical reasoning thatisderived from

more than ten years of personal managerial and consulting experience in the

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Part

I:

Evolution of

the

Telecom

Arena

Strategic Question

0

Economics in 0 ®

Trends in the TheTelecomArena Network Based

Telecom Arena

Part I

Industries

-_PTT's -Monopoly - Convergence

-Classic Telecom -Deregulation - Globalisation

-_{International Deregulation} -_{Contestability} -_{Industry Structure} -Future Regulation -Infrastructurecharacteristics - Technology

'1

Problems intheInternational Corporate Strategy

@

International Multimedia Industry _{Part 11} MultimediaActivties Organisation

Deconstructionof ValueChains _Uncertainty GeographicalScope ScenarioPlanning

-Globalisation Potential - MultimediaIndustryScenarios - Multimedia Activity Framework

4

Implications for the International Corporate Strategy

0 0

International Reflection and _{Part 1 1 1} Corporate Strategy Contribution

-Implications - ComparisonofStrategy Concepts

- .GlobalAnyweb" Activities - ApplicationinotherNetworkBased Industries

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1 The

Telecom

Arena

The strategic questionthat motivated me towrite this book is set inthe context of

developments in what I call the "telecom arena".

The term "arena" is well suited to describe what is currently taking place in the

telecommunication services industry. Meriam-Webster Online Dictionary lists the

following entries for"arena":

1 : an area in a Roman amphitheatre for gladiatorial combats, and

. . . .

3a:a sphere ofinterest, activity, or competition (Meriam-Webster 2003) The description"a sphere_{of interest, activity} orcompetition" serves asthe basis for defining theterm"arena" inthisbook. 1

A decade ago,thetelecomarenawaseasily described, in that the189member states of theInternationalTelecommunicationUnion (ITU) each had a_monopoly _operator

that provided communication services (ITU 2003). Deregulation in the majority of

the member states reshaped the picture significantly. Tbday, there are numerous companies who wishtoenter intoa_{country in}_{which deregulation}hastaken place, or who already poseathreat totheincumbent. In_{Austria, one of the smallest European}

Union member states, nearly 500telecommunication licences were granted to new

entrants in2002. Currently, the telecom arena is wide open for the creation of a new

industry.

In thischapter, I

will

development of theindustryenvironment and explain the need

for change for the involvedindustry participants. This part oftheindustry analysis

will

bepresentedinthreesteps:

- The firststepprovides thehistoricalperspective on thetransportofpeople, goods

and information inthe monopoly areaofpostal,telegraphy and telephonyservice

providers (FIT).

- The second step describes the main activities and specifics of what I call the

classic telecom _{operator preceding the} first major round of deregulation, and

provides the basis for the remainder of this book.

- Step three analysesthe impact ofderegulation and thedriving forceforchange

withinnetwork-basedindustriesduring the last decades,upontelecomoperators'

need toconsiderinternationalstrategy.

'

(25)

1.1 _{Thlephone services}

as

state

_monopolies

The beginning of telephony dates back to_{March 7, 1876, when Alexander Graham}

Bell patented the "Improvement in _{Telegraphy" under Nn 174465 in the} United

States ofAmerica (USPTO 1876). The picture belowshowsthe

first

twopages of his patent.

Figure 3: Thefirst twopages ofthe patent from Alexander Graham Bell

-'..':- ='... ,.:" .".':'.

I·<t. 1 i . 6.

TK..1,16'SY- ...8/=5. e :t;.k

S...S'.,&; A#dk,2,8 S...,4:. ...e ...., /. "#.

·41 ... ..,.:.'... -..· - ... -- ·· ···, «·---3 'f- .- --- .... ... ...- - - ....-. 1_ 1 1. 1 7 ./ .. .. .. I ... -.., 9 - - ... V .... ... + .... - , _{11'\ i t, i ' ·.} 43 I q- - - V* „· ···· ·-· • --.'.,- I I -. -I : ; l: :i : # ,1 ».. ..C:- A.r:' t-· fil'' '4'4rt: *44.:4 .*/ lf,2. . &4*:1:··: 3..., ....: ' -. :... t....t..1 z , 1 '···'·8K*44<AL»1/Lt 42::., k /\ /\ «k'. i A-,t:, 1.:»*'. y:- f.4--\..:7.-1.2.-,2

'.--„. „A

'.«.: 11.4 .»3.-%¢.=11» , L .,l., t.,=t··-···-...T-

·-··. ,J

...,..'..., IN'leI- '...'.*'. I '""-e 6-444/4.0 : 4=4-.441 "='. 6,l,&.*•6:'.*... ..bu•·•3,•W.

649*2

_{6„..3 *2.:'+ 1 .'.}8-+45*.... 4,4 ,&414 / Source (USPTO 1876)

The

first

telephonytrials were exclusivelywithincities, andregulationwashandled by the local government. Few peoplerealized howimportantBell's inventionwould become for our society In fact, its relevance was initially so marginal, that the

handlingof telephony companieswithinthe regulatory environment was not defined.

(26)

The invention of thetelephone led to a new meansof communication. One_important

question thatwasraised was

if

telephony,liketelegraphy, wouldbecomeamonopoly

business.

During most of the 208 century, the majorityofdeveloped_{countries had monopoly}

telephony services. The service quality was low compared to today. For example,

people had to wait for months

until

theyreceiveda telephone line, and the colour of

one's telephone wasextremelylimited. Figure 4: The

first

telephonesystem

- .,T.2-2- 1- - - . ' A ....·' igh

t »- --4.- --'-th,; 2 .4

15;Ellaillili AM

*=

1

-i r

hl .,Axf 1

*(:4% . 4 ' 11 1 t

%**mi# /116, 1,4. N·f.11.1 I

...„-...„...

Source:Scientific America,October 6. 1877

Onthe other hand, the telephone almost always functioned, andusers never had to

refer toa _{manual, recharge} abattery, orchangeanyother usagebehaviour. During

the period of monopoly telephonyservices,therewas

little

innovation, but also a high

reliability

ofservice.

It is interesting to notethatpeople,regardless of thecountry inwhich they lived, had the same experiencewithmonopoly telephony services. The next sectionprovides a

historical_{background about the development of telephony}service _{monopolies in the}

(27)

1.1.1 Development of

the

telephone service monopoly in the US

In theUS,GrahamBellwanted to se]1hisinventionto Western Union,which, at that

time, was the most powerful telegraph company. However, Western Union did not

buy theBellpatent,believing thedevicewasnothing more thanapassing novelty. In 1877, GrahamBell_{established monopoly services with}a_private_company, _{secured by} his patent, fora_{period of}fifteen_years.

In1880, TheodoreVailassumedthe position as COO of theBell Company. Through Vail's vision and management capabilities, Bell Telephone Company eventually became AT&T

The company that became AT&T began in 1875, in an arrangement among

inventor Alexander Graham Bell and the two men, Gardiner Hubbard and

Thomas Sanders, who agreed to finance his work. Bell was tzying to invent a

talking telegraph -- a telephone. He succeeded, earning patents in 1876 and 1877. In 1877, the three men formed the Bell Telephone Company to exploit

the invention. The first telephone exchange, operating under license from Bell Telephone, opened in New Haven, CT in 1878. Withinthreeyears, telephone

exchanges existed in most major cities and towns in the United States, operating under licenses from what was now the American Bell Telephone Company In 1882, American Bell acquired a controlling interest in the

Western Electric Company, which became its manufacturing unit. Gradually, American Bell came to own most of its licensees. Collectively the enterprise

became known as the Bell System. The American #lephone and #legraph

Company was incorporated on March 3, 1885 as a wholly owned subsidiary of American Bell, chartered to build and operate the original long distance telephone network. Building out from New York, AT&T reached its initial goal of Chicago in 1892, and then San Francisco in 1915. On December 30, 1899,

AT&T acquired the assets of American Bell, and became the parent company of the Bell System (AT&T 2003).

Duringthe period from1894until 1913, thepatentmonopolyareagradually came to

an end,and competitionaroseinseveralUS cities.Around1900, there were over 200

telecom operators in the US.

(28)

By 1913, AT&T had grown to such a large size that the company was given a

warning thatitcould comeunder

antitrust

observations followingthe Sherman Act.

However, Theodore Vail was able to influence the government in such a way that AT&T received the _{opportunity to} _grow furthen In the years that followed, public opinion changed in a waythattelecommunication was seen as a natural monopoly (c.f.2.2.1). In 1921, this wasmadeofficialthrough the Graham Wills Act.

The Depression in the 1930s_{prompted a}new _{thinking within the}U.S. _government

andbusiness circles. Policy makersbelieved that the Depressionwas_partlycaused

by competitive markets and could be solved _through _government intervention.

During the _{period of} _{Franklin Roosevelt's "New Deal", the} _{US experienced a}

(29)

1.1.2 Development of the telephone service monopoly

in Germany and

Austria

The existence of state monopolies for the transportation ofgoods _{and people has a}

long history in Europe. Voice and data services were _{initially regulated as one}

category.

The _original _set-up of voice and data services was _{developed in the "Heiliges}

RBmisches Reich Deutscher

Nation". In

1597, Emperor Rudolf

II

granted the

"Kaiserliche Postregal"2 to the family which isnow known under the name

'Thurn

und Taxis".This_family_{dominated the postal} servicesin_{Germany and}Austriauntil

1867 Prussia bought back the rights and took over the postal monopoly. The area

that "Thurn

und Taxis" originally covered with its services changed with the

development of the political map in Europe. In Austria, Kaiser Karl VI declared postalservicesa_{state monopoly in 1722, and separated the}servicefrom"Thurn und

Taxis" management.

The contentofstatemonopolies_{changed over time. The}transportationof people led

to a _{growing importance of steamboats and railways. The} _{transportation of}

informationreceived_greater_importance_throughtheinventionoftelegraphy. Samuel

Morse's invention in 1830 gave rise to _{telegraphy services. In many countries,}

telegraphy services were a part of the postal monopoly, as the

definition of

telegraphy, like the post, was thetransportation ofmessages.

In Germany, the

first

telephone connection was established by the general

postmasterHeinrichv. _{Stephan and the general telegraph director Budde, who with}

the help of twotelephones_{from Graham Bell, called}oneanotheronOctober26,1877.

After their successful telephone call, v. Stephan and Buddeimmediately requested

the company Siemens & Halske to produce more of the Bell technology-based telephones. On December 14, 1877, Germany's Werner von Siemens received the

Patent Nr. DRP 2399, entitled 'Telephone und _Rufapparate mit magnetischer

Gleichgewichtlageder_{schwingenden Teile"( Telefonmuseum-Hittfeld 2003).}

In 1855, the role ofthe government

in

telegraphyserviceswas discussed

within the

various German states.

In

Prussia, the

first

proposal for a telegraphylaw included

the reasoning for a monopoly _service, namely that telegraphy

carries with it the

character of a state institution that cannot be given to the private industry for

(30)

Telephone services, which were introduced by the 'Deutsche Reichspost and

Telegraphenverwaltung", and considered an evolution oftelegraphy services, were integrated into the state monopolyin1877(Feyerabend 1929).

In that sameyear, Graham Bell's telephone technology was introducedin Austria,

and thereafterinGermany. However,theinitialcommercial usage did not takeplace

until 1881. The "Wiener-Privat-Telegraphen-Gesellschaft" applied for a licence in

1879, but it took the ministry oftrade _{until June 3, 1881} to grant a licence for a

radius of15kilometres around the"Stephansturm" inVienna. In 1892,atwhich time

five companies offered telephone services in Austria, the government decided to nationalize all telephone companies. By 1895, all ofthe telephone companies were

integrated into the "Ostereichische Post- und Telegraphenverwaltung"(Gunther

1992).

1.1.3 Development of the telephone service monopoly

in

Switzerland

During the period of "Thurn und Taxis", the "Eidgenossen" of Switzerland were

politicallyindependent from the surrounding"Heiliges R8misches Reich Deutscher

Nation", therefore, regulationdevelopedindependently.

'IblephonyservicesinSwitzerland were part of the country's telegraphy services, and beginning in 1878, runas_{state-owned monopolies}(Spiech 1999), asthe government

did not want to assume the risk ofbuilding up telephonyinfrastructure without

knowing ifthe technology would succeed. As a result, the 'Telegraphen-Direktion"

issuedlicencestoprivatecompanies.The

first

telephonyservicewasintroduced by a

privatecompanyinZurich.

However, customerscomplained about the qualityofserviceand_speedof execution providedbyprivatecompanies,which in 1880 led to thedecision toconstructa

state-owned telephony network. In 1885, theprivatetelephonenetworkwasbought by the "Eidgenossenschaft" with the goalofovercoming the comparablyslowgrowthrates. In 1920,the"Bundespost" and the'TelegraphenDirektion"wereintegrated into one

national monopoly company known as P'IT (Post, Telegraph and Telephony)

(31)

1.1.4

Consumer

acceptance

during the

first

period

of

telephone

services

Theeconomic_{implications of}a_regulatedintroduction_{of telephony}servicescompared

tothe introductionof telephony services in anopen marketaredifficultto measure,

since telephony services were

introduced in most of

the observed countries as

monopolyservices. Themost consistent set of data available was that on the spread

of_{telephony services in the}US.During thepatent-protected era from 1880 to 1895

acceptance of telephony services was slowly rising. The period of competition

following1895_{brought gains unimaginable just a few years earlier.}

"After seventeen years of monopoly, the United States had a limited telephone system of 270,000 phones concentrated in the centers of the cities, with service generally unavailable in the outlying areas.

After thirteen years of competition, the United States had an

extensive system of six million telephones, almost evenly divided between Bell and the independents, with service available practically anywhere in the country(Brock 1981)."

Industry historians Leonard S. _{Hyman, Richard} _{C. Tbole,} and _{Rosemary M. Avellis}

summarise the overall effect ofthisperiodby stating,

"It

seemscompetition helped to expand the market, bring down costs, and lower prices to consumers." Figure 5

illustrates_{the growth of telephone service in the US between 1880 and 1920.}

Figure5:_Spreadoftelephone service, 1880-1920

Year AverageDailyCalls 'Iblephones Per 1,000 of

Perl,000Population Population

(32)

Average daily calls increased 100-fold over the 40-year period, and the number of telephones increased from 1tonearly 124 per1000population.

Figure6_provides a _{graphical presentation of the data,} inwhich the increase in the

growthrate beginning in 1895 can be seen.

Figure6:Growth oftelephone

installations

Telephones Per1,000Population

140 r 120

-1

1 1

80 60

l

u - I

t

20

O ..I- , -1-__ //

1880 1885 1890 1895 1900 1905 1910 1915 1920

This growthoccurredafter the protection period of Graham Bell's patentended.

However, the data does not prove that deregulation was the reason for the

growthoftelephonyservices, as theshape of thecurve isalsorepresentative for a

typicallifecycle for theintroduction and growthphaseoftechnology services.

It would be incorrect to assume that the growth rate was purely a coefficient of

competition following the expiration of Bell's patent. Other factors, such as the

economic situation and _{consumer adoption rates} during the early stage of a new

technology, can alsosignificantlyinfluencegrowthrates.

Thisdata clearlyshowsthesignificantgrowth intheacceptanceof telephoneservices

andtheresultingimportanceonother markets as of the start of the208 century.

(33)

1.1.5 Summary - The

first

period of

telephony

GrahamBell invented the telephone in 1876. The technology spread within one year from the USto Germany,SwitzerlandandAustria.

In the US, Bell was able tobuild up monopoly services during the 15-year patent protectionperiod,whichwasfollowed bya_{period of}_openmarkets.

In Europe, the situation was different, as telephony services were seen as an

improvement of telegraphy, and which started as state-owned monopolies and remainedmonopoliesuntil the1990's.

There is not much statisticalevidence aboutthe economicimplications ofmonopoly

services compared toopen markets in the build-up phaseof telephony services. In

Europe, there are no comparable examples, and the periods of regulated and

deregulated markets in the US canhardlybecompared. The onlyknown fact from that period isthat growthratesoftelephony users in the US were byfarhigherafter

Graham Bell's patent expired and competition intensified. However, there is no

statistical evidence that this growth rate was the result of emerging competition.

Economic, political and technology life cycles could just as wellbe reasons for the

(34)

1.2 The Classic

Telecom

_Operator

I tooktheperspective ofanincumbenttelecom operator

in

Europein formulating the

strategic question for this book. The characteristics of telecom operators weresimilar in _{European countries, such} as Germany, Switzerland andAustria. I will base the

description of a classic telecom operator on the Swiss incumbent telecom operator

andits_organisationbefore_{deregulation (1996).}

An organisation can be described on the basis of several factors, for example the

organisational set-up, management and employees, geographical reach, customers,

products, brands, and unique selling propositions or processes. The literature

provides various suggestions on how to describe a company from the corporate

perspective (Fischer & Lorenz 2000, Porter 1980). This _chapter

will

focus on the

telecom specific points relevant for the strategic question by setting them into the

broadercontext.

Fischer & lorenz. investigated the typical incumbent telecom operator for the

definition ofthefuture European policy framework (Fischer & Lorenz 2000). They

indicate thattheincumbentisusually incontrol of

- the local loop,

- _{strong customer relationships/contacts in the}_retail_{market, which is seen as a}

very valuableasset,

- thenational

tariff

structure, and

- thecellularnetwork and datainfrastructure.

These characteristics make telecom operators unique and are characteristics in

which theydifferfromother productioncompanies._However, one specificfactor that

Fischer & Lorenz donotconsider is the

full

vertical integration ofthe value chain for telecommunication services. Typically, a telecom operator dominatesthe market in

every aspect ofits value chain, and isa characteristic that is _very relevant to this

book.

To specifya_{business' strategy}_process,Porter recommends that an_industry_analysis

onthe description ofa companybeconducted. Forthisreasonheintroduced the five

forces model(Porter 1980) and the value chain (Porter 1985).

The five forces model, which is based on _competition, new entrants, substitutes, supplier power and buyer power, is of limited use in a _{monopoly environment.} Competition, new entrants and substitutes were non-existent over a _{period of}

decades forthe classic telecom operator. Suppliers of telecommunication equipment like telephones or modems were not allowed to enter the market. The monopoly

situation inthe telecommunicationsindustrytherefore reduces the fiveforces model

(35)

Porter'sother known concept,the value chain analysis, is importantlooking at the

characteristicsoftelecom operators. Specifically the strongvertical integration from

infrastructureownership toserviceprovisioning and customer contact is unique and

has a strong impact upon the operator's corporate strategyprocess is. This section

provides a description of the telecommunication value chain and the products supplied through that value chain.

In

_{addition, the} international activities of

(36)

1.2.1 Definition of

the telecom operator

Telecom operators design, build and operate telecommunication networks for

households and businesses. Traditionally, corporations emerged from postal service

organisations and were set up as national monopolies with a universal service

obligation. Due to the growthoftelephone and data services, the complexity of the

industry increased and the importance and size telecom operators became more

significant. Today, telecom operators are among the largest

national and

multinationalcorporationsinEurope.

The size of the telecom operator in Europe has been

primarily

dependent on the

number of households and businesses in the respective country. The table below

shows the ranking of the ten biggest public telecommunication operatorsbased on revenue in 1999. Operators'revenues, which were

fairly

stable in monopoly times,

are, following deregulation,permanentlyfluctuating Intense merger and acquisition activities, as well as_{divestments, are lead to} achange

in

telecom operators'market

position.

Figure 7: Top 10_{public telecommunication operators} Ranked by1999revenue

Rank Telecomrevenue Net income Employees

199 Operat,r(Countty) :™i i,„,) Change(98'99) ™ -, la,ange(98-99) Total(000@ Change08-99)

1 NTT (Japan) a 97'953 6.7% 2'821 -46.0% 223.9 -0.2% 2 AT&T(UnitedStates) 62'391 17.296 3'428' -34.5% 147.8 37.1%

3 SBC(UnitedStates) 1 49'489 7.190 8'159. 6.1% 204.5 2.1%

MCI Worldcom (United

37'120

104.3% 3'9411 * 77.0

4 States) 5 DeutscheTelekom 35'750 1.196 1'309 -40.996 195.8 O.0% (Germanp 1 6 _ BT (United Kingdom) a :34'955 20.2% 3'264 -31.9% 136.8 9.7%

' _Bell_Atlantic(United '

7 33'174 5.1% 4'202 41.7% 145.0 3.6%

States)

8 ChinaTelecom(China)

i

27'539 14.5% ... ... 444.5 ...

9 FranceTildcom(France)

|

2T344 10.5% ₂₇₈₆ 20.5% 174.3 3.1%

;10 TelecomItalia (Italy) |

27229 8.2%

1'745 -12.2% 122.7

-1. 1%

Abte· United Statesdollarvalues areobtainedbyusing operator suppliedexchangeratesor ending period exchange rate. Net

incomeisafter tax-tindicates that NetIncomewasnegative in1997and/or 1998. a Year beglnning l April. b Year ending 30

June. * = 1997 data.

Sourre International Telea,mmunlcation Union FrO Database. CITU, 2001. Last update: 14·Feb-01

Incumbentoperatorsweretraditionallycalled "FIT<, based upon the combination of postal, telephoneand telegraphy services, and the name of thecountryinwhich the

(37)

organisationalset-upoftelecomoperatorswasoriginally nationallyoriented and the headquarterswere_{located in the country's capital.}Inaddition, different departments handled postal,telecomand telegraphyservices.

When deregulationbecame the subject ofpolitical discussions and itbecame clear

thattelecommunicationsmarkets would eventuallybederegulated,change began.

In 1992, SwissFIT underwent its first major reorganisation after fortyyears. The

different nature and regulatory treatment of postal services, telephone and

telegraphy (telecom) services led to an organisational differentiation. Theunits for

postal services and telecom were separated from each othen Following the reorganisation, the telecom unit was named "Swiss Telecom PTT'. With time,

branding became more important, and "Swiss

Telecom P[T

was renamed

(38)

1.2.2 Customer base

In a traditional retailbusiness, the customerbasedictates part ofthepositioning of

the corporation.Thesuccessoftoday'sretailbusinessoften lies ina strongcustomer

focus and successful application of concepts like "One to OneMarketing" (Gilmore et.al. _{2000; Peppers}et.al.1999 and_{"Customer Relationship}_Marketing" _{(Curry 2000;} Brown 2000).

For a classic incumbent telecom operator, thesituation was _{significantly}different.

The _monopoly _{regulation and} universal service obligation specified that telecom operators hadtoensurethat telecommunicationservices werereasonablyaccessible

to allpeople

within

the geographical area regulated by the government.Tariffs had

to be set on an equitable _basis, regardless ofwhere a citizen resided or ran his

business.

Due tothemonopoly situation, marketshare was 100%, with a_{growing penetration}

rate in

the countries under study. In Switzerland, there were 4.2 million analogue

exchange lines (Swiss FIT 1996) for around 3.5 million households and 300,000

businesses(Bundesamtfur Statistik 2003). Intheinternationalcontext,Switzerland

has traditionally had a highpenetration rate fortelephones andcomputers. All of the lines and relatedserviceswere owned_{and maintained by Swiss FIT.}

Customer segmentation,which inmost cases is the keyto successfulmarketing, was not necessary in a _monopolymarket. However, as_{competition increased, customer}

focus became more_important. _{Competitors who enter a new}_{market target the most}

profitable customer segments (cherry picking). Therefore, to _protect its customer base, Swiss

PIT

implemented for the

first time, in 1992,

an organisation that

addressed different customer segments, the

first

of which was the segmentation

betweenresidential andbusinesscustomers, andmultinationalcorporations. 1bday, these segments are addressedby severalsalesorganisations,shopsandpartners.

(39)

1.2.3 Portfolio

Thereare_{certain products that are common} among classic telecomoperators. Swiss

P'ITs1996annualreportlistssixareasinwhichSwiss FIT wasactive4(Swiss FIT

1996):

- Voice-Transporting voice overafixed telephone network is thecorebusiness

of a classic telecom operatorand generated themajority of itsrevenues. Voice services include the connection of calling parties, physical connection of

households, equipment maintenance, phonebooks, and information services.

In 1996, internet services were also part of voice services, since the connection to the internet was done viavoicedial-up lines.

-Customer Equipment-Customer equipment was the product area

in

which

private automatic branch exchanges (PABX) for business customers were

installed,leasedandmaintained.

- Data Services - Data services,thetransport of dataoverdifferentnetworks, evolved in the 1980's and 1990's with thegrowth ofthe computerindustry.

The networks were based on several _technologies for _{specific purposes.}

Leased line networks made up the majority ofdata services, while X.25 5 , Ip6, A™7 and Frame Relaynetworks were in the developing stage. Value

added services, an add-on to data networks, are _important value drivers

today, but werelesssignificant in 1996.

- Networks - Theclassictelecom operator used to own all of theinfrastructure,

from the local loop to the switch and the long distance cable. Swiss PT['

differentiated between the units that _{provided the service to the customer}

and the unit that owned and maintained the network. "Networks" was the

unit that set up thenetworks for voice and data services. This activity was

the most capitalintensive product area and provided the reasoning for the

natural monopoly status.

-_{Mobile Communications}-_{Mobile telephony was the highest growth area. As}

early as 1996, more than 600,000 mobile phones were sold

in

Switzerland,

where the population was less than 8 million inhabitants. The mobile unit

provided all of theservicesfor operating the "Natel80_service_in_Switzerland.

- Radio and Television - Radio and television transmission was handled

(40)

and maintained the transmitter. The television channels were transmitted

overtheterrestrial network thatwasbuilt so thatthecostscouldbejustified

in the alpine regions. The FIT also collected licence revenues. Radio and television is not necessarily a telecom _{activity. In} some_{countries, radio and}

televisionserviceswere_{handled by other corporations.}_During_the_{process of}

deregulation,telecom operators wereforcedtosplit theirradio and television networksfromtheirtelecomorganisation.

The above list is different than the hierarchy used by the EC for its monitoring of

telecom operators (EU 2002 IDC). The EC uses the categories fixed telephony,

mobile, internet, broadband, cable TV and leased lines.9 _{A comparison of both}

hierarchies shows that most of thecontent is similar. Thetwo hierarchies cover the

same product areas and services, which is not surprising, given the underlying

technologies and needs for interoperability on a global scale. Two major differences

areworth_{noting here:}

-_{Customer Equipment,}_a

category ofSwiss FIT, is not_{listed by the EC. The} equipment marketwas _{liberalised several years ago and is} no_{longer under} theregulatorymarketperspective.

- The EC _{listing has} a _{separate category} for internet. In 1996, Swiss PTT's

internet service was part of its voice product area, with 10,000 customers

usinganalogue_ordigitalvoicelines to dial into theinternet.

An interestingfactamong telecomoperators is thata singlephysicalentitycan serve

multiple purposes andcan generate revenues for different _{products. For example,}

based upon special multiplexingtechnologies, afibre opticcablecansimultaneously

transfer numerous phone

calls from fix

and mobile users, as well as fixed data

connections, and canalsoserve as part of theinternetbackbone.

(41)

1.2.4

Vertical

value chain

This section looks at the primary activities 10 that a telecom performs so that a

customer is able tousetelephone_services,_{transfer data, or watch TV.}

All functions, from

the management of the physical network to customer care activities, are completely vertically integrated at a classic telecom operaton The

Network Management Forum (NMF) developed _{the 'Telecom} _{Operations Map" 11,}

that provides a standardisation for efficiency in information systems management.

The figure belowshowsthedifferentprocessesandresultingactivities:

Figure 8:

A

simplified view ofprocesses used byaservice_provider

Customer

1

-Customer Interface Management Process

Order Problem Customer

1 1 ....in,

Sales _QoS Handling _Handling

Management Collection Customer Care Processes

Information Systems Service _Service _Service

Rating and

Service Management Planning/ _{Configuration} Problem Quality

Discounting Processes Development Resolution Management

Service/Product Development and Maintenance Processes

Network _Network _Network

Network Data Planning/ Network

Provisioning Inventory Maintenance Management Development _Management & Restoration

Network and Systems Management Processes

Physical Network and Information Technology

soume: Network Management Forum (NMF1998)

" The term primary activity"is_{based on the value chain definition from Michael Porter. He differentiates in the generic value} chain between primary- and support activities.

International Corporate Strategy in Network Based Industries: A Case Study for the Emerging Multimedia Industry

Tilburg University

International Corporate Strategy in Network Based Industries

Fladung, M.

Publication date:

2004

Document Version

Publisher's PDF, also known as Version of record

Link to publication in Tilburg University Research Portal

Citation for published version (APA):

Fladung, M. (2004). International Corporate Strategy in Network Based Industries: A Case Study for the

Emerging Multimedia Industry. [n.n.].

INTERNATIONAL CORPORATE

STRATEGY

IN

NETWORK BASED

INDUSTRIES

Michael

Fladung

...

...

INTERNATIONAL CORPORAT TRATEGY

IN

NETWORK

BASED INDUSTRIES

Table

of

Contents

MULTIMEDIA

List

of figures

List

of figures

Introduction

dealt with

first

All

Strategic question

in

within

entrance into

market as one

field of

International

Corporate

Strategy

will

answer the corporate level question, "What business should we be in?"

V

investment in diversification, vertical integration, acquisitions, and new

industzy or market. If the firm is to prosper within an industrs it must

as well as

V

within

in

in

Methodology

within

However, the

Integration of

8 corporate

Technology 1

Structure of the book

0 ®

® ®

Part

I:

Evolution of

the

Telecom

Arena

0

Part I

@

0 0

1 The

Telecom

Arena

will

will

_Fladung

_{of figures}

_{of figures}

_Corporate

_Strategy

_{Integration of}

_{Thlephone services}

_monopolies

_Operator