Abstract
1 Introduction
As the European countries rebuilt after the Second World War, the state became both the prime agent within the economy and the principal and dominating supplier of welfare and related services (Manning and Birley, 1992). In the sectors of the economy, where services were provided that were deemed of vital importance to the population, the government took control and set up state owned monopolies. These institutions provided their services free-of-charge or with rates lower than the costs (subsidized from the government budget), with usually outstanding quality and in a monopoly situation (Van Mierlo, 1990). As these companies provided services nationwide, these companies became very big and powerful institutions within the political system. They were also invaluable to the public, because they were the only ones able to provide those necessary services. This system was introduced throughout Europe and state owned monopolistic companies served the markets, in which they were set up, well.
These companies have existed for a number of decades, but in the 1980’s the economical crisis pushed policy makers towards changes. They decided that these government-owned companies put a major burden on the bureaucracy, by demanding a lot of time from policy makers as well as public servants. These companies also had a massive impact on government spending. Government spending was a major political issue at the time, because many governments in Europe were struggling with high budget deficits. In order to fix these deficits they thus developed plans to privatize these companies and in the recent years many countries across Europe have privatised state owned firms and deregulated markets in which there was a state monopoly. These markets are telecommunication, electricity and gas and transportation. Government have sold parts of the companies and passed legislation allowing other companies to enter formerly closed markets. In many of the companies the government did remain a major shareholder and in some cases it held a deciding vote when it came to strategic decisions.
that privatisation and deregulation have lead to the demise of the welfare state. They state that the service provided to consumers has diminished, investments in safety have been lowered and the networks have become less dependable. Others praise the increase in efficiency. They state that privatization has lead to lower prices for consumers and healthy competition between companies.
In literature about privatization a major focus is on the design of regulatory bodies which are needed to control the formally state-monopolized markets. These bodies are introduced to ensure that the quality, competition and prices stay within acceptable ranges. Cox (1999) states that the paradox of a liberalization process is that a re-regulation process is required. Regulation is a necessary condition for fair and efficient competition in network industries. This public regulation of liberalized network industries basically combines two potentially contradictory objectives (Cox 1999).
The first objective Cox (1999) describes is an economic regulation. It is required to introduce and maintain competition. It encompasses activities ranging from the set-up of the legal order creating the competitive environment (liberalization), through the design of the rules governing the industry (production standards) to sanctions of anti-competitive and/or discriminatory behaviors (anti-trust regulation and sectoral regulation) and the implementation of third-party access to natural monopolistic infrastructures. The second order regulation or political and social regulation aims at correcting the impacts of liberalization. It mainly concerns redistribution mechanisms as well as the provision of public services obligations (PSO) in a market configuration, and the implementation of public policies (Cox 1999).
Another prime focus is the public performance by privatized companies. Héritier (2002) for instance compares the performance by British, German and French rail and telecommunication companies before and after the privatization. She finds that there is no clear picture on whether or not privatization accomplishes the goals of the government and that it varies per country and sector.
This thesis does not aim to answer the question of whether or not privatisation is a good way of reaching the goals as specified by the governments. It aims to analyze the strategic behaviour of companies that are faced with a privatising market. A lot has been written on privatisation, the underlying assumption has always been that it is a given fact and its success has to be measured. This thesis will take a different approach, by analysing the concrete results of privatisation from a company perspective. As companies are faced with privatization and liberalization of a market they have many strategic decisions to make. The formerly state owned enterprise will see itself facing many internal changes in order to become a profitable business and it will see new competitors enter the market as well. In a situation with such a highly volatile environment the challenges facing these companies are enormous. New entrants also face many decisions. They have to decide on the mode of entry, positioning of their products and deal with a formerly state owned enterprise that starts off with a 100% market share.
Redwood (1993) however states that all business had to recognise that many problems it confronts are business problems and business is best equipped to handle them. In other words, privately owned businesses are more capable than any other type of institution to deal with any such problems. So even though the privatization caused many problems for these companies, people believed that the liberalized and privatized markets were the best answer to those problems.
Box 1. History of Telecommunications Liberalization in the Netherlands • 1989: Corporatization of KPN and liberalization of terminal equipment and value
added services.
• 1993: Liberalization of data communication services and resale of leased lines.
• 1994: Partial privatization of KPN (involving a sale of 30 per cent of the shares); voice telephony in closed user groups permitted.
• 1995: Issuing of licenses in mobile services, to KPN and Libertel; further sale of 25 per cent of the shares of KPN.
• 1996: Liberalization of telecommunications infrastructure and liberalization of all telecommunications services except fixed voice telephony.
• 1997: Liberalization of voice telephony (1 July) and establishment of an independent regulator (1 August).
• 1998: Issuing of 2 new national mobile (DCS1800) licences.
Source: OECD report: Regulatory reform in the telecommunications industry in the Netherlands (1999).
As companies such as Libertel, Telfort and Ben decided to enter the Dutch market and as KPN was now facing a multitude of competitors, I believe this case will be a source of interesting facts and insights.
The strategic decisions made by these companies in the privatizing market will be the foundation for the main question this thesis will try to answer. By examining the strategic choices made by the above mentioned companies, comparing them to the literature on strategic management and finding out whether or not they have been successful, this thesis will try to answer the following question:
In order to answer this question I will conduct a case study. To build the framework for this case study, I will use a number of sources. I will use information from newspapers, OECD reports, annual reports of the companies involved as well as academic literature. In the next chapter I will discuss the current state of knowledge on the subjects this paper deals with. First I will explain the most relevant theories about privatization and liberalisation. I will go into the question of why governments decide to privatize their state owned businesses and how these companies perform after being privatized. Following this paragraph I will give an overview of the existing literature on strategic management. The focus in this chapter will be on describing the strategic theories that are most relevant in a situation where a company is facing a liberalizing market. Because of the international element in this study I will then describe the relevant theories on internationalisation and international management. In this chapter I will also indicate the possible weaknesses and limitations of the application of these theories in this study.
After that I will discuss the methods I have used to conduct this study. Here I will show which data I use and what the limitations of these data are and how I collected and analysed the data. In the chapter after that I will present the case and describe the events and decisions made during the privatization and liberalisation process. Following I will analyse the results of the study. This chapter will also be used to critically assess the usefulness and relevance of these results. In the final chapter I will draw my conclusions based on the theory and the results of this study.
2 Theoretical background
In this chapter I will discuss the existing literature on which I will base the design for my research. First I will deal with the literature on privatization and then I will go into the relevant literature on strategic management and change management. In the last part of this chapter I will describe the relevant literature on international strategies, since most of the companies involved in this research operate internationally. The point of this paragraph will be to see how the international strategies by these companies impact their strategy on the Dutch telecommunication market.
2.1 Privatization
As mentioned in the introduction the main reasons for governments to start privatizing their firms were the pressure they put on the government spending and the bureaucratic load they imposed on the politicians and civil servants. Policy makers also believed that the performance of these companies would improve after they were privatized. In this section I will give further explanations as to why government run firms are less efficient and privatization and deregulation are a better alternative. Then I will discuss the articles that compare the situation before and after the deregulation, in regard to the performance of the privatized firms. In the last part of this section I will explain how new regulations are used to manage competition and create a level playing field.
2.1.1 Reasons to privatize
(1996) conclude by stating that the privatization of firms solves the agency problem with politicians and leaves only the agency problems with managers. They state that the agency problem regarding managers is much less intrusive on the efficiency of the firm, than the agency problem with the politicians. Apart from the lack of efficiency in state owned companies, their effectiveness may also be in question. This will be discussed in a following paragraph, which will deal with the performance of these companies from the public’s point of view.
Krueger (1990) also indicates that the self-interest of civil servants as well as politicians has a negative impact on the cost effectiveness of state owned firms. The role of interest groups is one of the other focal points in her article. As certain policies favor or have a negative impact on a certain group of people, interest groups may be inclined to support/oppose the policy. The result is firm behavior that serves a different purpose than maximizing efficiency. Another disadvantage she points out is that such state owned firms may be pressured to hire people with good political connections rather than hire the person best qualified to do the job.
Dewenter and Malatesta (2000) give the following summary of what they believe is the reason state-owned firms are less efficient than privately owned firms: Government-owned firms are thought to forgo maximum profit in the pursuit of social and political objectives, such as wealth redistribution. In addition, the residual cash flow claims of these firms are not readily transferable like the shares of a private corporation. This impairs residual claimant incentives to monitor managers and, ultimately, degrades the government owned firm’s performance. As a consequence, one can expect government-owned firms to be technically less efficient and therefore, less profitable than private firms. From an agency theory perspective, this means that the principals have less means to control the agents and thus the agent is less likely to pursue the same interest as the principal. The implication is that in competitive markets without significant externalities private ownership is the superior organizational form.
subsidized, most firms have to raise their prices. On the other hand the public does not have to subsidize inefficient firms anymore, because the government no longer has to take care of the losses made by the firms. In some sectors, the charges have come down so substantially that the consumers have actually gained directly. In other sectors this is not the case. The main advantage he points out here is that the services are now paid for by the people who use them (Lane, 2002).
While the government may still be a holder of a large portion of the equity of the former public company the public may also benefit from this ownership. As the company is successful the state will make money and as the state is no more than a legal entity, the public owns the company indirectly. However Lane (2002) does note that the public will hardly be interested in this indirect ownership. From the general public’s point of view, it therefore seems to be a hardly relevant aspect.
Most of the literature seems to be unanimous in favor of privatizing government owned firms, even though there are some minor disadvantages. Most of the above mentioned articles, either explicitly or implicitly, refer to the agency theory as an explanatory factor for the problems facing government owned firms. The basic premise of this theory is that there is a principal, usually the owner of the company. This principle has to make sure that his agents, usually the managers, pursue the same goals he does, namely to maximize the profit of the firms. The cost associated with this are referred to as agency costs. The following diagram summarizes the change privatization causes from an agency theory perspective.
Even though interest groups, labor unions and the general public will still have an interest in the company, the basic responsibility of the firm and the managers is now to their shareholders. These shareholders are also able to exercise more pressure on the managers, because they have the power to sell their shares. This diagram shows that in the new situation there are fewer conflicts of interest and thus the agency costs are likely to be lower than in the old situation. However, this approach paints a very one-sided picture, as there are still many other stakeholders in a firm. In paragraph 2.1.3 I will explain how governments make sure the interests of these groups are not neglected in favor of the shareholders.
2.1.2 Performance of privatized firms
Another import body of literature regarding privatization is articles in which the performance of privatized firms is compared to their performance before privatization. This research is usually done in a certain sector or one particular country. It focuses on the profitability of the firms involved or on the services provided to the general public.
Harper (2002) for instances assesses the performance of privatized firms in the Czech Republic. Companies in the Czech Republic were privatized using vouchers, which could be purchased for a relatively small amount of money and used to acquire ownership of shares in a firm. This was done in order to distribute wealth amongst the public and because a lot of companies had to be privatized at the same time. This process was done in two phases, which Harper (2002) refers to as waves. He finds that while there is improvement in some areas of performance following privatization, there is an expected significant decrease in employment following privatization as well as a decrease in real sales (output). Furthermore, he finds that the most important factor in determining a firm’s performance following privatization is in which wave the firm was privatized. First wave firms fared much worse than second wave firms. The surrounding political and economic situation in each wave is a potential explanation for these findings, as well as an ‘‘implicit seasoning’’ of firms involved in the second wave. This is an indication that the firm’s readiness, before being privatized is a very important factor. This is an important issue in the rest of this paper, where the strategic choices before and during the privatization process will be a prime focus.
dominated by single public enterprises which both owned the infrastructure and provided services. As public services, company railways were subject to state intervention, allowing limited management autonomy. One goal of state intervention was to impose public-service obligations in order to secure mobility for all and to enhance regional integration within the nation-state. The emphasis on the interest of the public is in line with the position of the articles discussed earlier. She investigated the trend in the years before privatization and the trend in the years after privatization. This means that the results in each of the tables indicate a dynamic situation before and after the privatization. Héritier (2002) compares the passengers/kilometers, network length, prices and safety before and after the privatization. The results are shown in table one.
Table 1 Performance under the old/new regime: rail
Passengers/ Kilometers Network length Prices Safety
UK fewer/ decrease/ moderate increase/ increase/
significant increase moderate increase increase decrease
Germany fewer/ decrease/ moderate increase/ increase/
Moderate increase moderate decrease moderate increase medium
France fewer/ decrease/ moderate increase/ increase/
Moderate increase moderate decrease moderate increase medium
Adapted from Héritier (2002).
The table paints the same picture for all the countries. The overall picture in the old regime shows declining use, accessibility and continuity, as well as price increases and relatively good safety records and in the new regime the use of the services increases and the safety decreases (Héritier, 2002). The only very noticeable difference is that in the U.K. the safety record is much worse than before privatization.
universal access, that is, to connect remote areas to national networks and to provide services at a reasonable and geographically average price (Héritier, 2002). Table two shows the performance under the old and new regime in the telecommunications sector. In Héritier’s article she also compared the prices, but that did not change after the privatization, so it is not mentioned in this chapter.
Table 2 Performance under the old/new regime: telecommunications
Lines per 100 people Innovative services Time until connection Public telephones
UK ----/ ----/ ----/ ----/
moderate increase big increase reduced moderate increase
Germany increase/ increase/ decrease/ moderate decrease/
moderate decrease big increase decrease moderate decrease
France moderate increase/ increase/ decrease/ moderate decrease/
moderate increase big increase decrease moderate increase
Adapted from Héritier (2002).
The British pre-privatization data is not taken into account, because the performance of the British telecommunication firm was very inconsistent. As supply met demand in 1984, the availability and quality of service diminished rapidly. Héritier (2002) explains that the level of prescription for the level of public service, the degree of liberalization and the technological innovation in the sector determine the success of the privatization in the markets she researched. The companies facing a higher level of service prescription have more problems, while sectors in which there is more technological innovations seem to do better. As markets are more liberalized, the performance of the firms also increases. Especially in the telecommunication sector the level of innovation supersedes that of other privatized sectors.
2.1.3 New regulation after deregulation
been acknowledged in the recent literature. While some private markets need effective regulation to reduce transactions costs and ensure stable market rules, consumers need regulation that is responsive to, and protective of, their interests (Hira et al., 2005). Hira et al. (2005) also state that consumer participation is very important in designing these institutions. By making sure that the public is well informed and has an influence in the design process, the regulatory bodies should function better. This is however not an angle supported by many other authors. Something that is mentioned by many authors is the fact that the government plays an important double role. On the one hand the government is the main regulator and in charge of forming the institutions, while on the other hand the government may also own a large portion of shares in the privatized company. According to Bauer (2005) public and mixed ownership generally coincided with higher interconnection prices in the telecommunication sector. He also investigated the performance with regard to universal service obligations. He measured to which extend companies would supply additional socially required services. Over the entire period he states that his data seems to indicate that state ownership does not imply a higher likelihood to serve social output goals without explicit compensation. In other words, regular companies were as likely to serve social output goals as state owned companies. Public ownership also went hand-in-hand with less independent regulatory institutions. In the beginning of this century that seemed to change. This change is probably the outcome of institutional changes that improved the degree of independence of the national regulatory agencies and strengthened competition oversight at the national and EU levels (Bauer, 2005). He does note that this positive change is due to the strong and stable institutional setting in the EU and is not likely to be transferrable to countries with a less stable institutional setting.
Genoud and Varone (2002) discuss two orders of regulation. These refer to the process of ensuring a level playing field as well as regulating the social and political objectives regarding the interest of the general public. They describe these orders as follows:
• The second order regulation or political and social regulation aims at correcting the impacts of liberalization. It mainly concerns redistribution mechanisms as well as the provision of public services obligations (PSO) in a market configuration, and the implementation of public policies (Genoud and Varone, 2002).
They continue with a list of requirements for the regulatory bodies in a market. These bodies should firstly be as independent as possible. Secondly they should be accountable for their behavior and decisions and thirdly there should be good coordination between sector specific regulation and the general market competition regulation.
Levy-Faur (1999) describes competition not as a market phenomenon or as a function of technologies. It is the product of a political process with critical inputs for state actors. The construction of a regime of competition for any economic sector, even the deregulatory regime of telecom terminals, involves massive and extensive political bargaining, which imposes heavy demands on politicians and bureaucrats. He states that the focus on competition in the current political arena has lead to the creation of many regulatory institutions. The rise of competition policies entails the rise of these agencies, and in effect means the creation of a new form of political control over the economy. Furthermore, the higher the value we place on competition, the more assertive the role of these agencies is likely to become. The welfare state and the developmental state are required to provide more room for a new form of state, namely the "competition state". A new layer of governance and institutions is being superimposed on the old one as the historical process of state building continues (Levy-Faur, 1999).
It is clear from the above that the privatization and deregulation process results in a new regulatory landscape. As new institutions are created and rules are designed and changed companies have to react and anticipate to these changes. The strategies used by companies to meet these changes can mean the differences between success and failure. Before I will explore which strategies the companies in the Dutch telecommunication sector used, I will first go into the literature on strategy.
2.2 Strategic (change) management
In this chapter I will discuss the existing literature on strategic management and change management. After giving an overview of the relevant literature, I will then relate the insights from the literature to the challenges faced by companies that are operating in a privatized environment. This will explain which problems these companies encounter and the possible solutions to these problems.
2.2.1 Strategic management
Strategy is one of the most popular subjects amongst scholars. According to the resulting large body of literature, strategic management deals with the creation of a sustainable competitive advantage. This can be achieved when a firms implements a value creating strategy, which others are unable to duplicate (Hitt et al., 2001). Even though many authors have written about strategy there are a number of classic works that remain important to date. The first approach I will explain here is the generic strategy approach by Porter (1985). He describes three generic strategies, which can result in a competitive advantage. These are cost leadership, differentiation and focus. A company using the first strategy will focus their attention on keeping the costs as low as possible, resulting in above average returns. When a cost leader sells its product at the same price as the competition, its margins will be higher, since its costs are lower. In order to be able to achieve success with this strategy a company must have a substantial market share.
Uniqueness low cost position
Differentiation
Overall
Cost Leadership
CUS
FO
industrywide Particular segmentDifferentiation refers to a strategy in which a company tries to establish a unique feature. It can either have a strong brand name, technological superiority, customer service or access to resources that other companies don’t have. Companies using a differentiation strategy have a competitive advantage because of brand loyalty by consumers, resulting in a lower sensitivity to price. The result of a successful differentiation strategy is a situation in which a company is able to sustain high margins due to this lower sensitivity to price. Porter’s (1985) next strategy is the focus strategy. The focus strategy means that a company does not service the entire market, but picks particular segments of a market. The idea behind this strategy is that the company will be able to serve the needs of this segment better than companies who don’t focus on a particular segment. This company will have to create either a differentiation or cost leadership in their segment of the market, without being a leader in the market as a whole. This approach has been criticized by many other scholars. The main criticism on the generic strategy approach is that it oversimplifies the real life strategic decisions that companies need to make and that a generic strategy is never sophisticated enough to work in an actual business environment. It does however still serve as an important tool to form and analyze the strategies used by companies.
Deliberate strategy Unrealized strategy Emergent strategy Intended strategy Realized Strategy
Figure 3. Deliberate strategy and emergent strategy. Adapted from Mintzberg (1987)
Strategy can also be a position in the company’s environment. This is closely related to the focus strategy by Porter (1985). The company can position itself to serve a particular niche. This niche can be a geographical area or market segment. Similarly the strategy as a position can also refer to the choice to serve an entire market or multiple markets. Strategy as a perspective emphasizes the way the strategists in a company perceive the world. It refers to the mindset of the company. A certain company can be a trendsetter, while another company is a follower. It does not mean that there is a prescribed plan to take those actions, but according to this definition it can be the way the collective strategists think. The main point that can be learned from Mintzberg’s theory is that strategy is not always a predetermined plan, but must be seen as the broader behavior of a company. For this study it means that I have to look at the plans companies made, as well as the actual patterns, their positioning, specific ploys and their perspectives on the market. Mintzberg’s perceptions of strategy are thus used to structure the way of thinking about strategy.
operate in and they will usually be aggressive in defending this part of the market. Defenders don’t spend much time on scanning the environment outside their domain and often try to vertically integrate their business. Their operational focus is on finding efficient ways to manufacture and distribute their services and goods. These companies also have a stringent administrative system, where the focus is on efficient planning and cost-control. Defenders achieve growth mainly through market penetration. The second typology is the prospector. The prospectors respond to their environment in an almost opposite way as a defender. They don’t have a small market segment to focus on, but they have a broad and continuously developing domain. This typology shows resemblance to the differentiation strategy proposed by Porter (1985). Prospectors are constantly looking for opportunities to find and exploit new markets. They grow by developing new products and markets and their growth normally occurs in spurts. Prospectors are also the companies that create change in an industry, by innovating new products and services. Miles and Snow (1978) also discuss a third typology for businesses. They call this type the analyzer. Analyzers are a combination of prospectors and defenders. They try to minimize risk and maximize profit by combining the strengths of both. They have a hybrid domain, which is both growing and stable. Their growth is steady, through product development as well as market penetration. A fourth type of organization described by Miles and Snow (1978) is the reactor. A reactor’s environment is both unstable and inconsistent. These companies usually respond to their environment in an inappropriate way and are not able to adapt to changes. These companies will often go into bankruptcy if something unexpected changes in their environment, since they don’t have the strategies required to deal with these changes. This means that the only viable strategies are the first three, the defenders, prospectors and analyzers.
protection of the core competencies, can a company be truly successful. The focus in this approach is on people as well as capital. In the traditional view of strategy the allocation of capital was of vital importance, but the allocation of key personnel was often neglected. In order to make sure that knowledge and expertise are diffused through the company, Prahalad and Hamel (1990) propose that businesses have to make sure that people are moved around within the company. In comparison to the first three theories mentioned in this chapter, Prahalad and Hamel (1990) don’t emphasize the positioning of a company in its environment, but the unique strength that a company has to acquire and protect. If a company is able to do this, the company will be successful. In this thesis it will be interesting to see if the management of the companies realized the importance of their core competencies and how the companies involved managed their core competencies. Furthermore the focus will be on what the results of the actions taken by the companies are.
2.2.2 Change management
Change management refers to the process of implementing a policy, strategy, plan etc. Since people have a general resistance to change, this imposes pressure management to overcome this resistance and make sure the change is implemented according to plan. The most important models regarding change and change management will be discussed in this paragraph.
Pettigrew and Whipp (1993) integrate the change and strategy literature to create a model that explains the capabilities required for managing competition and change. Their model of strategic change is shown in figure 4. They distinguish three dimensions, namely content, context and process. The content dimension deals the “what“ of the change, the process dimension with the “how” and the context dimension deals with the environment in which the change takes place. They divide the context into two parts, the internal and external context.
Content
• Assessment of choice of Products and markets • Objectives and assumptions • Targets and evaluation
• Change managers
• Models of change
• Formulation/Implementation
• Pattern through time
External
Internal
Economic/business Resources Political Capabilities Social Culture Politics Process Context
Figure 4: Understanding strategic change. From Pettigrew and Whipp (1993)
chapter that dealt with the privatization. The rest of this paragraph will deal with the process of change. It will thus be about models for change as well as the role of managers during change. The implementation of the changes is also discussed in the remaining part of this chapter.
The most basic model of the process of change is introduced by Lewin (1951). His model describes three stages of change. The first stage is unfreezing, which means that managers have to create the motivation for change. In the case of the privatization of the Dutch telecommunications market this stage seems easy. The changing environment of the company should make everybody in that company aware of the fact that it needs to change. The job for managers then is to emphasize that current practices will not be successful when the situation changes. The second stage is the actual change itself. This stage involves learning at all levels of the company. New visions and practices have to be conveyed to employees. The third and final stage of Lewin’s model is refreezing. During this stage employees and management have to integrate the new ways of doing things into their normal way of doing things.
According to Schein (1980) there are five underlying assumptions to this model. The first one is that change requires learning. As the process of change takes place, new attitudes, behaviors and practices have to be learned. Second, change will not occur unless there is a motivation to change. The third one is that people are central to each change. Any change has to any system requires the people in that system to change. The fourth assumption is that resistance is even found when the goals of the change are desirable. The last assumption that Schein (1980) discusses is that new behaviors always need to be reinforced in order for the change to be successful. This means that behavior that is in accordance with the changed situation has to be rewarded and old behavior has to be corrected.
organizational culture, including norms and believes, will also change and the structure of an organization will be reformed. According to Levi (1980) this type of change can only occur when the driving forces to change are strong enough. These conditions can be put into four categories.
The first category is the permitting conditions. These are: • The availability of resources to manage the change • Having a strong enough coalition to support the change. The second category is the enabling conditions. These are:
• The degree of threat to an organizations’ survival • The degree of radicalness of the change
• The degree of tolerance for transformation in the system
The third category is the precipitating conditions. These are:
• The tendency of organizations to grow quantitatively and qualitatively. • The tendency of organizations to experience decline.
• The feelings of dissatisfaction by organization members and the emergence of unmet needs.
• The pressure of stakeholders • A real and perceived crisis
The fourth category is triggering events. They include new management, environmental shock, mergers or take-overs, major conflicts or political changes.
In the case of the Dutch telecommunication market there is a major political change and a dramatic change in environment, so the triggering events are present. It will be interesting to see to what extent the companies involved experienced a second order change and how they managed this change.
point was the organizational development stream. This stream advocated incremental change, using employee participation. Levi’s model already showed that change can be both incremental as well as transformative and according to Dunphey and Stace (1988) change doesn’t necessarily involve participation. They created a matrix in which put together incremental/transformational change and participative/coercive change in order to establish four types of change. The participative evolution type is most similar to the organizational development stream. It means that change takes place in an incremental fashion and by employee participation. This mode is preferable when an organization is slightly out of fit with its environment and key interest groups are in favor of the changes. The second type, Charismatic transformation, refers to a second order or transformational change, with is accomplished by employee participation. This should be done when the organization is severely out of fit, but there is support for change. Forced evolution is the third type and deals with an incremental change which is done without participation. This option is preferable when key interest groups oppose the change. The last type of change Dunphy and Stace (1988) describe is the dictatorial transformation. This is applicable when there is no support for radical change, bus it is needed for the organizational survival.
Figure 5 shows this matrix.
Figure 5 Typology of change strategies. From Dunphy and Stace (1988)
The biggest mistakes made by companies during a second order change are described by Kotter (1995). In this article he mentions eight errors that tend to cause a transformation process to fail.
• Not establishing a great enough sense of urgency • Not creating a powerful enough guiding coalition • Lacking a vision
• Under communicating the vision
• Not removing the obstacles to the vision • Not planning enough short term wins • Declaring victory to soon
• Not anchoring changes in the companies culture
Kotter (1995) stresses that in reality even successful change efforts are messy and full of surprises. Even more mistakes will be made in every situation, but the eight mentioned above are the most common and critical ones. The first four mistakes mentioned by Kotter (1995) fit the first stage of change as described by Lewin (1951). First management must establish that there is an urgent need to change. By doing this, employees will be receptive to change. Creating and communicating a vision, forming a coalition are important in the unfreezing phase. The next two are in the actual change stage. In this phase obstacles must be removed to make sure people actually get there and short term wins must be planned in order to keep people motivated. The last two mistakes mentioned by Kotter (1995) take place in the refreezing phase. By declaring victory too soon, people will be likely to return to their old behavior and make the change effort fail. In other words, the refreezing stage is skipped, meaning that changes will void. After a change is complete the new attitudes and behavior must be embedded in the organization culture, much similar to the integration into the normal way of doing things Lewin (1951) describes.
2.3 International management
In this paragraph I will discuss the existing literature on international management. As the new entrants to the Dutch telecommunication market are all international players, the international strategy of these companies can help explain their strategy in The Netherlands. This will help describe the challenges faced by the internationally operating companies in the Dutch telecommunication market.
According to Thomas (2002) culture is one of the main themes in literature on international management. It is vital to understand how culture works and what the cultural differences between countries are. In order to achieve these insights, Hofstede (1980) has done a landmark study in which he was able to describe culture in a set of dimensions. He surveyed 117.000 IBM employees in 40 different countries and was able to derive average scores for each country from these surveys. He did this by conceptualizing culture as 4 dimensions in order to classify the countries. These dimensions are power distance, masculinity-femininity, uncertainty avoidance and individualism-collectivism. The power distance dimension refers to the difference in power between workers and managers. Hofstede measured this by asking the workers how they perceived this. The masculinity-femininity has to do with the importance of harmonious relationships between co-workers and managers (feminine) and the goal orientation and importance of status (masculine). The uncertainty avoidance dimension deals with the degree that a society is looking to create stability and avoid situations in which the status quo might change. The individualism-collectivism dimension describes whether people derive their self-image from their own individual characteristics or the characteristics of a group they are part of. Hofstede scored all the countries in the sample on a scale of 1-100 for each of the dimension. Because the scores are averages, it is not possible to draw any conclusions about an individual in one of the countries.
The Uppsala model of internationalization (for instance Johanson et al. (1975)) deals with the entry mode of organizations in new markets. This model describes a linear process from serving a domestic market to becoming an international business. They call this process the establishment chain. According to this model the first step in the internationalization of a firm is export through an agent. In this phase the market knowledge and experience of the company are limited and thus the agent takes responsibility for all local sales and support. Once a company feels more confident in the foreign market it may set up its own sales subsidiary in the foreign country. During this stage the company internalizes the role of the agent. In the last stage it will also start production abroad and will be considered to have a full subsidiary in the other country. The main concept behind this model is psychic distance. As a country is more dissimilar to the home country of a firm the risk resulting from lack in market knowledge is bigger. This means that they will start carefully and try to minimize these risks. As they become more familiar with the market they will commit more resources to this market and move down on the chain.
partner can be found. In the Dutch case this option is used by most of the new entrants. They enter partnerships with Dutch banks, railway companies, etc.
Bartlett and Goshal (1989) deal with the structure of a multinational company. They describe four ideal types relating to the relationship between the home country and other countries. The themes they describe have to do with differences in strategy (local responsiveness vs. economies of scale), knowledge flows (direction of knowledge transfer), as well as structural differences. Since these typologies are ideal types most companies will have some characteristics of every type but predominantly fit into one of the mentioned typologies. As companies evolve they can also move from one typology to the other. In some businesses the structure is more dynamic than in others.
The first type they explain is the multinational company. This type of company has a strategy based on responsiveness to local markets. The national subsidiaries are highly independent and responsible for their own strategy. The national companies usually contain an entire value chain. With this structure knowledge that is developed in the subsidiaries remains there.
The second type is the international company. In this type the strategy of the subsidiaries is controlled by the home country headquarters. The national companies still have most of the value chain within them. Knowledge transfer only takes place from the parent company to the subsidiaries.
headquarters lead. A full value chain is only found in the home country and there is hardly any responsiveness to the local markets. Knowledge is usually kept centrally in the parent company.
The fourth and most sophisticated structure is the transnational company. This structure is based on responsiveness to the local market as well as scale economies and cross organizational learning. Knowledge flows occur from parent company to subsidiaries and back and also between subsidiaries. According to Bartlett and Goshal (1989) external forces will eventually drive all internationally operating companies towards this structure.
3 Methods
In this chapter I will describe the methods used to conduct this study. I will explain all the methodological choices that the study is founded on and go into the data collection methods. In this chapter I will give an overview of the information I have used during this study and evaluate that information.
The time period this research will deal with starts in 1995. The period before 1995 can be characterized as being very stable. KPN was already in mixed ownership and the competition was very minimal on a small number of markets. The strategy of KPN had remained similar for a number of years and the results of the company had been good. Before 1995 the new regulations as would be introduced later were still unclear and the degree in which possible competition would change the market situation still unknown. In order to compare the strategic behavior of KPN during the liberalization I will give a detailed description of the state KPN was in in 1995. The purpose of this comparison is to be able to explain KPN’s strategy by looking at their past strategies and thus establishing the strategic mindset. This refers to strategy as a perspective, as Mintzberg (1987) calls it. Another purpose of this description is that it will serve as a starting point for an analysis on the strategic change in KPN during the period I am researching.
The end of the period I research is the year 2004. Since preliminary research shows that the change process that this thesis describes had been completed in that year, a description of the periods after that does not add to the insights that this thesis aims to generate. The time period that the thesis describes will be divided in three sections. First I will briefly discuss the state of the company before the liberalization of the market. This means I will discuss the company before 1995. The next part will deal with the period between 1996 and 2000. This is a homogeneous period, strategy wise. Following that I will discuss the period 2000-2004. This period involves some major issues, first a crisis and then the recovery period and the changes that need to be made in order to achieve this recovery.
impact the possibilities for strategic maneuvering for all companies involved. For parties with considerable market power they limit those possibilities, for the other companies they should create chances. As the changing legislation favors competition and therefore pushes the market in a certain direction, these forces may impact the behavior of the companies and must be clear in order to explain these behaviors. Not only does the government regulate the market, they also controlled a large part of the shares in KPN during the period of the liberalization. This role must be investigated and the force field that results from it should be looked into in any analysis of the strategic behavior of the companies on the Dutch telecommunication market.
The main data collection method that I have used in this study is desk research. I have collected data from multiple sources. Most of the information comes from annual reports of KPN and the other companies involved. As the information in annual reports can be presented according to the companies wishes I had to use other publications and theory in order to evaluate the statements made in these reports. Even the profit numbers and other financial results can be colored by window-dressing. In order to interpret these numbers properly this had to be taken into account. The annual reports, however, are checked by independent accountants and there are very strict laws regarding the truthfulness of these reports. This means that, while considering the above mentioned downsides, I have put a high value on the information presented in these reports.
In order to make sure that the information I used in this thesis was both accurate and reliable I used a method called triangulation. This refers to a technique where a researcher obtains information about a certain fact or event from a number of sources and compares the information that those sources present. The researchers then tries to distill the most likely and precise turn of events by comparing the sources and analyzing the differences and resemblances. By using as many sources as available and judging each of these sources by the standards mentioned above he is then able to understand the information better.
4 The case of the Dutch
telecommunication market
In this chapter I will discuss the Dutch telecommunication market in the period of the liberalization and deregulation. The main focus will be on the strategies of KPN telecom, the former state owned monopolist. In the first paragraph of this chapter I will explore these strategies and evaluate whether or not they were successful. First I will give an overview of the company’s position and strategy before the liberalization of the Dutch telecommunication market and then I will go into the changing strategies as a result of the liberalization of the market. In order to place the strategies of KPN telecom into the proper context, I will also deal with the strategies of the new entrants. They will be compared to the strategies of KPN telecom in the second paragraph of this chapter. In the final part of this chapter I will explain the changing regulations and the impact they have had on all the companies involved in this case.
4.1 KPN
In this paragraph I will go into the strategy of KPN during the period of privatization and liberalization. In the first part of the paragraph I will describe the state of KPN in the beginning of the period. This will start in 1995 and I will also look at the years leading up to 1995. The following part of the paragraph will deal with the period of 1996 till 1999. These years were the years in which KPN was very much trying to keep doing what they had always been doing. In the final part of this section I will go into the period 2000 till 2003. This is the period in which KPN had to learn how to deal with the new situation.
4.1.1 KPN before 1995
The legislation was mild and margins on their services were substantial. In this year the profits of KPN grew by 10% and investors were very positive about the future of the company. At this point in time KPN telecom did not have any competition on most of its services on its home market and thus had the comfortable position as a monopolist, with a law in place in the Netherlands that prohibits any other companies from entering the telecommunication market.
The strategy of KPN telecom for the next years was to maintain the domestic market leadership, increase turnover and create value, expand its position on the international telecommunications market and continuous improvement of the price/quality ratio of its products and services. They were planning to achieve these goals by introducing new innovative services and at the same time providing their services at competitive prices with a focus on controlling costs. Furthermore KPN telecom had formulated the strategy to direct a great amount of resources to trying to convince end-users of the usefulness of the new services they developed.
The efficiency of KPN telecom had improved as their workforce went from 33895 to 32288 in 1995. Downsizing the workforce was important for KPN telecom because they wanted to keep costs low, in order to be able to have competetive prices when markets opened up in the following years. This put them in a difficult position as quality was their prime focus in the situation where they were able to set their own price level.
recent years certainly made it harder for people to believe that they may not be on the right track.
In the preface of the annual report on 1995 KPN’s CEO states that KPN and its employees have to be weary of complacency. This means that despite the uncertainty regarding the changes in legislation and new competition on the domestic market KPN telecom believed the future would be prosperous. Looking at the years before 1995 KPN telecom had every reason to believe this. As mentioned before the financial results were good and the quality of the services had also improved over the last five years as can be seen in table 4. The urgency for change as described by Kotter (1995) was definitely not present in the organization. According to Kotter (1995) this means that any change effort will be likely to fail. In terms of Levy (1980) this means that the prerequisites for a second order change are not met and any change that management will be able to achieve will be incremental. Given the heavy change in environment and legislation that KPN was facing that was not likely to be sufficient.
Table 4 Performance of KPN telecommunication prior to 1995
1991 1992 1993 1994 1995
Telephone connections --- 91% 91% 95% 95%
realized within 5 days
Fixed malfunctions 96% 97% 98% 98% 98%
within five working days
Malfunctions per 62 51 35 29 25
1000 connections
source: KPN annual report 1995
4.1.2 KPN between 1996 and 1999
These units were KPN research and KPN Real estate. According to Prahalad and Hamel (1990) this business unit structure means that knowledge is likely to be diffused through the business units and the company involved is unlikely to be a leader in its markets. The reason for this is the fact that they are not able to respond to changes in demand and customer preference. Figure 6 shows a simplified diagram of the structure of KPN in the year 1997.
KPN Telecom KPN International KPN Staff and services KPN Carrier services Western Europe America Afrika KPN Real estate KPN Research Home Phone services Asia Mobile Phone services Information tech. Central Europe Eastern Europe Ireland Corporate networks Telecommerce International Solution providing Devices and equipment
Figure 6: structure of KPN telecom after the separation from TPG Post
in Hungary, Denmark, Indonesia Ukraine, Ireland, and the Czech Republic. They also participated in a big international alliance, called Unisource.
The only part of the market on which competition was relevant in the year 1996, was the international telecommunication market. Since margins were high and the use of the KPN network only comprised a small portion of the costs of a phone call, new competitors were able to enter this market easily. As a result KPN was forced to lower its tariffs and also lost a portion of its market share. They however called this loss of market share limited. This means that they did not take it seriously as a precaution for other parts of the market when competition would present itself.
KPN was still trying to introduce new innovative services in order to differentiate itself from its new potential competitors. In 1996 such services included a wakeup call and a voice message service. The first one allowed a customer to call a number and enter the time he wants to be woken and KPN would automatically call him. The second service made it possible to leave a message for oneself that could be listened to, by calling a service number. Even though these services were novelties at the time, they did not give KPN any competitive advantage. They were not the kind of services that consumers thought were important and they were easy to copy by competitors, if they would want to. Apart from these services KPN also introduces free 0800 service numbers and paid 0900 numbers. Quality was also still a point of focus of KPN. When comparing the situation in 1996 to the years before it, KPN was still improving. In 1996 the connections realized in five days remained steady at 95%, while the amount of malfunctions per 1000 connections dropped further to 22. These malfunctions were resolved within five working days in 99% of the cases. This was better than the 98% in 1995. The goal to increase efficiency and reduce costs was not acted on too much in 1996. The amount of people working for KPN remained the same as KPN prepared to reinforce its sales division.
still no real sense of urgency regarding the changing environment and thus no real plans or strategies were formulated to defend the company against the problems resulting from the liberalization of the market.
KPN committed to the strategy of 1996 even more in the next year. The plan was still to increase turnover by introducing new services and stimulating the use of old services. They also wanted to offer these services at competitive prices. Given the fact that there was no real competition yet, it was very hard for KPN to determine what competitive prices were. Furthermore this strategy was still a stuck in the middle strategy as they wanted to be both innovative and cost oriented, without focusing on a niche market. KPN relied on the growth of the sector as a whole to compensate for the loss of market share. In 1997 they were able to do so in all markets, except for the international phone traffic in which there was a second consecutive year of negative growth.
The first awareness of the necessity for change appeared within KPN in 1998. They recognized that operators from other countries were catching up in terms of efficiency and also recognized that competition was going to be fierce. Their disputes with the regulatory body also continued. Following the forced sale of its cable network company Casema, OPTA announced that KPN had to cut its prices for local calls by 25 percent and long distance calls by 33 percent. It had looked at KPN’s profit margins and felt that KPN made more than reasonable profit on these services. According to OPTA the reasonable profit margin was 13.2 percent and KPN was making a lot more than that on these services. KPN first responded by stating that these price reductions would kill the company and contested the reduction in prices. They fought a publicity battle, but couldn’t win, because the general public liked the reduction in their telephone bill. When it turned out they were unsuccessful, KPN came up with a different ploy to counter OPTA’s decision. Since the prices OPTA prescribes are based on the costs plus a profit margin KPN decided to invest in the quality of its network and reorganize its company. These programs were both very expensive and required big investments. The OPTA then had no choice but to incorporate the costs for both programs in the price they prescribed KPN. By doing these investments at this time KPN was thus able to reorganize the company and invest in the quality of its network at the cost of the customer, by keeping prices higher than the Telecommunicatiewet and the OPTA both indicated.
workforce without much resistance. The third category, the precipitating conditions, was also present in this situation. The dissatisfaction with the regulations, the pressure of politics and regulators and the fact that the price cuts invoked a situation of crisis. The triggering event in this case was the measures as proposed by the OPTA. The program that resulted from these forces for change was called “the new KPN, better today than tomorrow” in contrast to the older change program. This program focused on changes in the near future rather than the distant future. Most of the changes, which should be done, occurred in 1999. An important element of the changes in this program involved a change in attitude to technology. In the previous years KPN had been trying to sell their new technologies to the consumer. Now they started to think from a customer’s point of view and put their focus on the customers’ demands. The technology served the purpose that the customer needed, instead of the other way around. They went from a technology push to a customer pull model.
In this year KPN was supposed to reduce their workforce by 4000 employees in order to reduce their increasing costs. However the growth in the sector and the growth of the company made them decide otherwise. Instead KPN decided to keep the employees and provide training to help them take a different position in the company. Another reason for this decision was the fact that there was a very tight labor market at that time. At the end of 1999 approximately 1800 of the 4000 employees had been transferred to an expanding part of the company. At this point there were still 2000 employees that were no longer necessary. KPN decide that most of them would be trained and placed at different jobs in the organization in the following year. Financially, 1999 was the first year of decline after a long period of constant growth. While turnover rose, costs grew even more, resulting in a lower EBITD-A (earnings before interest, taxes, depreciation and amortization).
and expansion and not for defending a potentially fragile position on a liberalized market. The growing telecommunication sector was the major reason KPN was able to do so. The period between 1996 and 1999 was the period in which KPN had to face the effects of the privatization of the company and the liberalization of the market for telecommunication in the Netherlands. At the beginning of this period KPN was a leader in efficiency and despite the relative small home market, they were able to expand their operations across borders. While KPN had plans to reduce their workforce and increase efficiency throughout this period, the focus remained on expansion and innovation. This meant that other operators got closer to KPN in terms of efficiency and it started to lose its leading position in Europe. Looking from a financial perspective, the profit of KPN grew until 1999. KPN proved to be a stable company and the result were as expected every year. At the end of this period, there were some indications that problems may occur in the future. The prices of the fixed services went down rapidly and the competition grew in each sector. However the management believed that the company was ready for the future. Because of the solid financial results in these years, there had not been any real crisis or need for transformational change within the company. Furthermore the largest part of the strategy that KPN had employed as a monopolist remained valid.
It was also the period in which KPN started its battle with OPTA. As the party with considerable market power many restrictions were imposed on KPN. According to KPN, these restrictions made it harder for them to compete on their home market. The same European regulations, that made it hard on KPN to maintain its position on the Dutch market, also invited them to expand their business abroad. This means that there is a positive as well as a negative side to this for KPN. The possibility of expansion was jumped on by KPN in the years following the liberalization of the European markets. The results of that expansion are discussed in the next paragraph.
4.1.3 KPN between 2000 and 2004
The period between 2000 and 2004 can be characterized as a period of crisis and recovery. With the end of the dotcom hype and the resulting decline of the internet and telecommunication companies, the entire sector got hit hard. After a number of years in which the sky was the limit, KPN was forced to focus on their core competencies and their operational results. This resulted in disinvestment throughout its portfolio and consolidation of the interests in the countries surrounding the home country. KPN had to work very hard to reduce the total debt and increase operational efficiency in order to survive the crisis that emerged in this period.
The first year of the period, the year 2000 was a very turbulent year for KPN telecom. In this year KPN finalized their investments in the German telecom provider E-Plus and the purchase of UMTS licenses in The Netherlands, Germany and Belgium. These purchases resulted in a total value for immaterial assets (goodwill and licenses) of more than 28 billion Euros. These investments were financed with a large credit provided by a consortium of banks. As a result the financial position of KPN was weakened. To illustrate this weakened financial position, the financial rating agencies diminished KPN’s rating from A- to B. In 2000 this did not worry KPN. They were confident that they would be able to attract enough resources in the future. The reason that the rating agencies reduced the status of KPN had to do with the amount of debt that they already had and the risk of the high valuation of the goodwill on the balance.
Figure 7: The course of the value of the KPN share in 1999 and 2000 source: KPN annual report 2000.
In 2001 the bill for KPN’s aggressive strategy was presented. Due to the lower value of KPN on the stock exchange KPN could not maintain its valuation of its immaterial assets. They had to reduce their valuation of the goodwill on their balance sheet by 14.11 billion Euros. This reduction and the debt position resulting from it meant that the future of KPN was on the line. The net result after taxes in 2001 was a loss of 7.4 Billion Euros. This loss could be largely attributed to the reduction in value of the immaterial assets. Despite this fact the operational result of KPN was also worse than the year before and things were not looking good for the company. For the first time since the privatization there was a real crisis within KPN. However this crisis cannot be attributed to the privatization or liberalization of the Dutch telecommunication market. It had to do with the strategy of KPN to expand aggressively.
This crisis was the reason that KPN had to employ the most radical changes in the course of its history. The model of Pettigrew and Whipp (1993) offers some insight into the nature of a radical change. The process of change includes the change managers, models, formulation and pattern through time. In order to make the changes necessary in this position a new CEO was appointed and the strategy of KPN changed dramatically. While the present CEO had not even been leading the company for two years the necessity to change the course was so eminent that this decision had to be made. The current CEO became the head of KPN’s mobile division and was not fired from the company, but his role was seriously diminished. The change of CEO was also necessary to be able to engage in a dictatorial transformation (Dunphy and Stace, 1988). The dictatorial change model is the main model of change in KPN during this process. The changes that KPN needed to make required a different type of leadership than the expansion strategy of the years before. The Board of commissioners was confident that the new CEO would be able to lead KPN during this process. This new CEO has been the prime change manager in this change process.
The content of the change, in term of Pettigrew and Whipp (1993) includes the selection of markets, objectives, targets and evaluation. The first objective was to increase the operational efficiency. In order to increase their operational efficiency, the workforce reduced by more than 5000 employees. A social agreement was made with the unions resulting in a voluntary termination of 2500 employees and another 2500 forced lay-offs. KPN also sold a considerable amount of their activities. These included interests in Eircell, Eircom, some real estate, KPN datacenter and a number of other activities that were not considered to be core activities. The cash revenues from these sales were used to reduce the debt and thus increase the strength of KPN’s financial position.
In the selection of markets KPN’s geographical focus was put on The Netherland, Belgium and Germany. These are all countries in which KPN had a controlling interest in the businesses in which they had invested. The countries are also located near The Netherlands and thus have a low psychic distance. This means that the market, culture etc. are similar to the home countries’ market (Johansen et al., 1975). Other foreign interests in which KPN did not have a controlling interest were reviewed and would only be kept if their performance merited it. Apart from improving the debt position of KPN, this was also done to make sure that KPN was able to control the money in the companies in which KPN had invested. They felt that they did not have enough control over their investments in the previous years, making it hard for them to maneuver.
Pettigrew and Whipp (1993) also include the context of the change in their model. In the case of KPN in the year 2000 all the economic, political and social stakeholders were on board with the change. Politicians as well as trade unions recognized the necessity of the changes proposed by the management of KPN.
