North American telephone and Cable TV companies have a significant investment in last mile copper networks. They are generally not deploying last mile Fibre-to-the-Home (FTTH). Where they are deploying FTTH, they are not offering gigabit speeds needed to support emerging information age [...]]]> By Eamon  D.  Hoey MBA, CMC and Ronald J.  Pickett MBA, CMC

North American telephone and Cable TV companies have a significant investment in last mile copper networks. They are generally not deploying last mile Fibre-to-the-Home (FTTH). Where they are deploying FTTH, they are not offering gigabit speeds needed to support emerging information age applications. This represents a barrier to communities seeking economic prosperity enabled by ultra-broadband.

Sweating the Copper

Telephone and Cable companies are hesitant to deploy capital to build FTTH. As a senior Canadian Telco executive recently remarked, “we are sweating the copper”. Carriers prefer to make incremental investments in their aged copper plant, rather than investing in FTTH. The tactic is to squeeze bandwidth from their legacy networks. The aim of “sweating the copper” is to maximize revenue, margins, and minimize capital deployment. This is not unlike any other firm. The tactic may be excellent for the companies but not necessarily for the communities they serve.

The Compromise

Much of the cost in delivering FTTH is in the last mile or the last 800 feet of a drop wire to the home. The compromise is to build Fibre-to-the-Node (FTTN). The node is generally within close proximity to the residence or business. This tactic permits a carrier to offer download speeds up to 50 Mbps. Its cousin Fibre-to-the-Curb (FTTC) can deliver download speeds up to 80 Mbps. Generally, the fibre terminates in an enclosure close to the residence or business. While these are interesting approaches neither FTTN nor FTTC are capable to deliver 21^st Century information age applications. What is required is ubiquitous symmetric FTTH.

Low Lying Fruit

Where Carriers are deploying fibre, is where the pickings are easy. Such settings include multiple-dwelling units (MDUs), new subdivisions, where there is effective competition, and where the outside plant is aerial. Where the telephone and cable firms are delivering FTTH, they are providing internet access services at speeds well below the capacity of fibre optics technology.

Capital Allocation Conflict

Compounding the lack of FTTH investment is the carrier’s capital allocation conflict. Many telephone and cable companies have a mobile and a local telephone or cable TV business. They choose to allocate a higher proportion of capital to their higher margin 4G mobile networks versus investing in FTTH. For example, Verizon U.S. has greatly diminished investing in FTTH. It has chosen to leave a large number of its subscribers, particularly those outside large urban areas with a low likelihood of being served over fibre. It continues to make significant investment in its higher margin mobile business. Similarly, Bell Canada and Telus have made small investments in FTTH while investing heavily in 4G mobile.

How Much Capital

Capital Intensity (CI) is the percentage of revenue that a carrier allocates to capital investment. A high CI results in lower profits and decreased dividends. Typical, in the telecom industry the ratio of revenue to capital investment is 15% – 20%. Carriers who do not maintain a consistent CI suffer a decline in their stock price. The market punishes those carriers with a high or inconsistent CI. The CI limits the amount of expended annual capital. There is only so much capital to allocate.

Measuring Success

The emerging community based networks measure success by attracting knowledge based industries, highly paid jobs, increasing average income, lowering telecommunications costs, digital inclusion, and improving the overall quality of life. Wall and Main St. measure success markedly differently. Carrier success measurements include profitability, revenue growth, dividend return, earnings per share, and capital intensity. Community based networks are responsible to their citizens, whereas carriers answer to their stockholders. These are very divergent objectives. Communities should not hold out the prospect that telephone or cable companies will meet their needs. It is simply an unrealistic expectation.

When is enough speed enough?

The President of a medium size telephone company recently suggested, at a Toronto investor conference, that download speeds of 40 Mbps is adequate for most customers. Only in extreme situations would a consumer require a download speed of 250 Mbps. Another Telco executive posed the question “When is enough speed enough?” While an interesting question, in reality we really do not know the answer. The relevant questions are “What are the needs of communities today and in the future?”, “How can these needs be satisfied today and in the future?”, and “What will ensure economic prosperity in a highly competitive global world?”

Smart Communities

The tactic of “sweating the copper” satisfies investors and Wall Street analysts. However, it does little for communities seeking the economic advantages enabled by FTTH. Accordingly, many communities in North America have grown impatient with the speed at which Telcos/Cablecos are deploying FTTH. They are unwilling to rely on them to provide the 21^st Century infrastructure to enable economic prosperity for their communities.

Bristol, VA, Chattanooga, TN, and Lafayette, LA provide successful examples of how communities can develop an economic strategy enabled by an FTTH community-owned network. That is despite the opposition of the incumbent telecommunications companies. These communities have increased the average income in their communities. They have attracted knowledge-based firms with high paying jobs to their communities and advanced manufacturing. By building a FTTH network, they have improved the community’s quality of life. They are economically prospering.

Conclusion

It is clear that incumbent carriers are not motivated to deliver 1 Gbps symmetric FTTH networks in the near future. They have a capital allocation conflict. They much prefer allocating capital to their mobile networks versus FTTH. Smart local governments must lead the deployment of FTTH. They need a clear vision and communicate why broadband FTTH matters. The need for broadband is stated within a framework of driving economic prosperity.

In 1998 Martin, then Canada’s Finance Minister, blocked the merger [...]]]> The Canadian Radio-television and Telecommunications Commission (CRTC) denied BCE Inc.’s $3billion takeover of Astral Media Inc. This may be as profound as Paul Martin’s decision to deny the merger of Canada’s banks. As with the banks, it may push BCE to seek growth beyond Canada.

In 1998 Martin, then Canada’s Finance Minister, blocked the merger of the RBC and BMO and of the CIBC and TD Bank. Martin thought the mergers would further concentrate Canada’s banking sector, reduce competition, and increase the banks market power. The CRTC has similar concerns with BCE’s acquisition of Astral.

The banks had a need to grow, as does BCE. For organizations of BCE’s size, Canada presents few opportunities for major growth within their sector. Martin’s decision took the banks proposed growth tactic off the table, as does the CRTC’s for BCE. Martin’s decision caused the banks to seek growth beyond Canada.

Banks Find Growth Opportunities beyond Canada

Subsequent to Martin’s decision, TD acquired small USA banks. Today, it has more USA than Canadian branches. Similarly, Scotia accelerated the growth of its global operations. Canadian banks, in the last two years, undertook 50 acquisitions valued at CDN$42billion. These assets are in Mexico, Columbia, China, the Caribbean, Luxembourg, USA, and Canada.

Martin’s policy created a stronger and less concentrated banking system, less vulnerable to recent international banking crisis, and more sustainable. His policy brought benefits to Canada. For BCE, the CRTC’s Decision presents a comparable opportunity.

Canadian Corporations Go Global, Except BCE

Banks are not alone in exploiting foreign opportunities. Toronto based Alamos Gold Inc. operates mines in Turkey, Mexico, and Canada. Alimentation Couche-Tard Inc. has USA and overseas operations, as has consulting firm CGI. Fairfax Financial Holdings Limited has insurance operations in Canada, USA, UK, Southeast Asia, Eastern Europe, the Middle East, and Brazil. Of FP’s Top 25 firms, 22 report sales outside Canada. BCE reports none!

Global Telecommunications Winners

In sharp contrast to BCE, its foreign rivals have exploited global opportunities.

Norway’s Telenor Group has cellular enterprises in Scandinavia, Eastern Europe, and Asia. It has 203 million cellular customers, 27 times BCE’s 7.5 million!

U.K.’s Vodafone Group Plc. provides cellular in 30 countries and partners in 40 more. The world’s second-largest cellular provider has 439 million subscribers, 58 times BCE’s!

South Africa’s MTN Group operates in 21 African and Middle Eastern countries. It boasts 183 million cellular customers, 24 times BCE’s!

Digicel Group Limited has 12.8 million cellular subscribers in 31 markets, in the Caribbean, Central and South America, and the South Pacific. It built its business in the last 11 years! BCE in the same period added 4.3 million cellular subscribers, 1/3 that of Digicel!

Telenor, Vodafone, MTM, and Digicel found global cellular market opportunities beyond their home market. By contrast, BCE stayed home preferring to remain a very, very, small cellular provider with low ambitions.

Contrasting Performance Raises Questions

In the cellular market alone, the contrast between BCE, Telenor, MTN, Digicel, and Vodafone is startling. It raises a number of questions.

What prevents BCE from following the example of its rivals? Is it lacking experience in the delivery of cellular services? Why is it content with only 7.5 million cellular customers? Why is it not embracing global opportunities, as is the majority of Canada’s Top 25 Corporations?

Is BCE the victim of bureaucratic persecution, as it often suggests? Or has the CRTC and Industry Canada made it so comfortable for BCE that it is content with its low performance?

Has BCE paid too much attention to the limited vision of Bay Street? Why has BCE failed to step up to a grander strategy? Is it so fixated on operations it cannot conceive of a more noble purpose?

Passive Performance

BCE enjoys a favoured position in Canada, a cosy comfortable existence in a well-protected oligopoly market structure. No surprise it has delivered decades of passive performance, at a significant cost to consumers and to our national detriment.

Globally oriented rivals have outplayed BCE. There is no lack of global opportunity to satisfy BCE’s desire to grow its business, except its own lethargy.

BCE’s challenge is to change its thinking.

The CRTC’s Chair, Jean-Pierre Blais, Decision to deny BCE permission to acquire Astral may have the same effect as Martin’s bank sector decision. It may shake BCE from its lethargy. Cause it to seek and seize global growth opportunities and create benefits for Canada.

First, let us see [...]]]> Mergers and acquisitions (M&A) are a popular way of achieving rapid growth and market entry. However, the performance of acquisitions is mixed. Half of acquisitions fail to meet acquirer expectations. Yet, acquisitions remain a central element of corporate strategy. How then can firms improve the post-acquisition integration performance of acquired firms?

First, let us see if undertaking an acquisition is a tactic worth following. Studies suggest the post-acquisition performance of acquired public companies is mixed.

Poor Performance

• 43% of international acquisitions fail to produce financial returns that exceed the acquirer’s cost of capital
• 45 to 55% of acquirers are highly dissatisfied or neutral with the performance of their acquisitions
• Acquired public companies gain 30% in market value while shareholders of acquiring companies lose 5%.
• 50% of individual acquisitions show positive returns
• if acquirers hold acquisition for an average of seven years, 40% the acquisitions are sold at a price that exceeds its acquisition costs

Positive Results

Three factors account for the disparity in acquisition performance.

1. the effectiveness of the post-acquisition integration;
2. employee resistance to the acquisition; and
3. the value the acquisition creates.

Let us have a closer look at how the post-acquisition integration may affect results. An acquisition may have opportunity for value creation. However; it does not guarantee acquisition success. Substantial organizational change may result from the realization of operational synergies, elimination of redundancy, integration of financial reporting and control systems, and the relocation of knowledge employees. To be successful, these changes must be implemented in a manner to create value. It must be accomplished without destroying the inherent value within the individual businesses. It also should not impose new demands on the acquired firm. Moreover, it should maintain the motivation of the retained employees.

The challenge is in deciding the degree to which organizations should be integrated following an acquisition. A lack of integration may hinder the transfer of strategic capabilities necessary for value creation while over integration may cause unnecessary organizational conflict adding to the implementation cost. Consider:

1. What value do you seek that is driving the acquisition? How much interdependence needs to be established between the two companies to achieve the desired value? For example, if there is a need to share resources and engage in knowledge transfer, then a high to moderate strategic interdependence is required. By contrast, if there is less of a need for operational value creation and restructuring, this suggests a lower requirement for interdependence.
2. Is it necessary to preserve the organizational autonomy of the acquired firm in order to preserve its distinctive capabilities?  For example, if the firm is being acquired for its innovation capabilities it may be important post-acquisition to preserve a culture, which supports innovation.

Carefully consider your answers to the above questions, as it will lead you to favour one of the four integration approaches outlined below.

1.     Absorb

You would undertake absorption if you have a high need for strategic interdependence and a low need for organizational autonomy of the acquired company. The goal is to absorb the new entity into your operation. Your aim is to consolidate the operations, the structures, and cultures of both organizations, and dissolve the boundaries between the firms. This approach emphasizes cost reduction and resource sharing. It will result in executive departures.

2.     Preserve

The goal is to preserve the acquired firm as acquired. It is a stand-alone subsidiary with a high degree of autonomy. This approach assumes a low need for strategic interdependence between the combined businesses. The acquired firm retains its organizational environment and its embedded capabilities.

3.     Symbiotic

In this approach to integration, firms are connected with and dependent on each other to the advantage of both. The goal of the acquiring firm is to achieve a balance between preserving the organizational autonomy of the acquired firm while transferring strategic capabilities between the two businesses.

In symbiotic situations, there is a high degree of strategic interdependence between the two businesses. However, the acquired firm needs to retain its autonomy as its capabilities are embedded in an organizational environment different from that of the acquiring firm. Typically, the acquired firm’s CEO is retained. This serves to protect the original organizational environment and capability.

4.     Hold

In this approach, the acquired firm needs to undergo a business turnaround. The acquired company’s underperformance suggests there is little requirement to preserve the existing organizational environment. Generally, a wholesale culture change is required to affect a turnaround. The dominant value creation mechanism is restructuring. A low level of strategic interdependence is required. Thus, the acquired firm is stripped of its autonomy. In such cases, there is little need for strategic interdependence beyond general management knowledge transfer and the implementation of tight financial controls.

The four integration approaches are a general description of the choices to a post-acquisition strategy. Complex acquisitions may contain business units or sets of capabilities that vary. Thus, there may be a need for trade-offs between strategic interdependence and organizational autonomy. There may be a need to use more than one integration approach. Reality may dictate a need to alter the approach. However, at the end of the day the trade-offs are essentially between strategic and organizational needs. These are the key determinants as to the choice of one integration approach over another.

Enterprise Resource Management (ERP) systems are in wide use by organizations’ financial, human resource, supply chain, and inventory management operations. Companies implement ERP systems for the purpose of integrating the [...]]]> Information Technology (IT) facilitates organizations with a decisive game changing opportunity. Current IT technologies and their applications provide organizations with opportunities to derive competitive advantage.

Enterprise Resource Management (ERP) systems are in wide use by organizations’ financial, human resource, supply chain, and inventory management operations. Companies implement ERP systems for the purpose of integrating the business processes thereby providing greater efficiency and reducing cost.

Customer Relationship Management (CRM) systems provide the opportunity for improving customer service and creating long-term relationships with the organizations customers.

Collaboration software systems, often referred to as Unified Communications (UC), permit enterprise teams to collaborate from anywhere on common tasks using voice, video, wireless, and document sharing platforms. This application enables geographically remote knowledge workers to meet in real time to solve enterprise problems. This eliminates travel costs and creates greater efficiency, contributing to a broad market cost leaders competitive advantage.

Michael Porter* provides a framework for pursuing competitive advantage. Below are examples of how IT helps supports Porter’s generic competitive strategies.

Wal-Mart, a broad market cost leader, uses an ERP system for continuous inventory replenishment. It captures sales data at the checkout counter and uses the data for restocking orders sent directly to suppliers. The system enables Wal-Mart to keep costs low while fine-tuning its merchandise to meet customer demands. British food giant Tesco transformed itself from a struggling grocery chain into a world-class retailer, in part by applying ERP and CRM to its business. It was the first to introduce a loyalty ‘Clubcard’. The card enabled Tesco to gather customer-shopping data, which identifies consumer trends and product gaps. This enabled Tesco to get closer to its customers and improve its product line. Tesco used this competitive advantage to become Britain’s largest grocer.

Amazon’s strategy employs broad market differentiation. It personalizes CRM information to recommend books to customers based on previous purchases. Its online one-click technology provides customers with a fast checkout service supported by Amazon’s ERP online ordering, distribution, and shipping system. Amazon’s disruptive business model has displaced the traditional brick and mortar chain bookstores. Amazon, with the help of ERP and CRM, re-invented the bookstore business.

Porter Airlines competes with a niche focus low cost strategy. It derives low cost by operating a single hub and spoke model. It flies only energy efficient low cost Bombardier Q400s. Moreover, it flies only to communities that are within 1,000 miles of Toronto. Porter Airlines chose to enter the market abandoning the traditional travel agent/call centre-ticketing model in favour of an online ERP model. It uses ERP for website ticketing, seat selection, flight status information, online check-in, and boarding passes. Its user-friendly website is convenient and a low cost distribution tool. Approximately 80% of Porter’s tickets are booked via an internet ERP connection. It also uses CRM for its frequent flyer program. ERP and CRM supports Porter Airlines’ niche focus low cost strategy. It provides a competitive advantage against Air Canada its primary competitor.

Apple Computer uses a niche focus differentiation strategy. It designs uniqueness into its products. Apple uses ERP to manage its supply chain. Apple’s profits and its gross margins were 40% in the last quarter of 2011, compared with 10 to 20% for most other device companies. This is in large part due to its focus on operations and ERP coordinating, manufacturing, procurement, and logistics. According to Gartner, Apple is the leader in supply chain excellence**. This provides Apple with a significant advantage over its competitors.

Some organizations chose to straddle the middle attempting to be all things to all markets. They attempt to be best cost providers while seeking differentiation and serving both the broad and niche markets. IT, while an enabler, generally cannot help organizations that lack focus. Few companies are successful with a straddle the middle strategy.

IT provides game changer opportunities. Technologically astute companies that use technologies such as ERP, CRM, and UC as an innovation enabler are likely to lead in their chosen market. Wal-Mart, Tesco, Amazon, Porter Airlines, and Apple are but a few examples of organizations that use IT in their chosen strategy to achieve competitive advantage. IT permits organizations to be cost leaders, provide differentiation, and use a broad or focused strategy. IT also enables organizations to be more productive, effective, market leaders, and deliver superior performance. Organizations that treat IT as a mere utility are likely not market leaders nor are they likely to use IT for competitive advantage.

Leaders make decisions today that create a desired future for [...]]]> To create its own future an organization anticipates and invests in tomorrow’s opportunities. This involves building an organization which supports innovation. The organization systematically seeks and converts ideas into products/services customers will buy and processes that improve corporate effectiveness.

Commit to a Future You Define

Leaders make decisions today that create a desired future for the business. Create a flexible long-term plan and set goals that can be adapted to changing external conditions. Execute the plan in the present to realize a desired future.

Create Room for Innovation

Organizations block innovation by failing to abandon old services tired revenue streams, and old ways of doing things. Evaluate which services should be abandoned. These include unprofitable and end of life services where growth is slow and where it is becoming difficult to compete. Hanging on to the past prevents the creation of your future. To create room for innovation, break with the past.

Undertake Transformational Change

Transformational leaders vigorously challenge corporate sacred cows, which limit new ideas and opportunities. They leave behind outdated assumptions about the business. Transformational change is never easy. For it to occur, abandon the past.

Systematically Seek Opportunities

Systematically seek opportunities as if your life depended upon it. Unearth opportunities in unexpected occurrences, unanticipated external events, demographic change, new knowledge, change in buying habits, incongruities, industry and market disparity, and where you have experienced failure.

Converting Ideas

The challenge is to create a disciplined approach that converts ideas into innovative services that customers want to buy and processes that improve the organization’s effectiveness. Most organizations do not have a process to drive innovation. Moreover, their structure and culture are barriers to innovation. To overcome these barriers, a defined process for innovation is required.

An efficient and effective process

• is designed to generate, manage, and evaluate ideas
• provides consistent, clear, well documented methodologies
• has a set of criteria against which all ideas are evaluated
• generates only the information required to answer the relevant questions
• is scalable, repeatable, and sustainable
• coupled with a powerful execution capability turns ideas into new customer services or improves organizational effectiveness
• creates a sense of urgency

Matching Innovation and Strategy

An organization’s innovation tactics articulates its opportunities in terms of defining new markets and the scope of their offering. To be successful

• define the space and set the scope of the offering
• set out to own the new space
• focus on the future versus what currently exists

An innovation process builds a portfolio of services and business processes that define the future of the business. The leadership asks

• What are our core capabilities?
• What resources do we have to build the future?
• What new skills do we need to develop tomorrow’s business?
• How will we balance the needs of today’s business with those of tomorrow?
• Are we focused on multiple businesses versus relying one?

Allocate the Resources

Allocate resources to services and markets where the leadership sees the company’s future. They ask:

• What resources are we allocating to tomorrow?
• Are our resources appropriately allocated to ensure a successful tomorrow?

To create your own future commit to a plan that describes the desired future. Create room for innovation by breaking with the past. Undertake organizational transformational change. Systematically seek opportunities. Convert opportunities by establishing an effective innovation process. Match your innovation tactics to your business strategy. Finally, allocate the resources to the task.

Kotter, John P. “Leading Change”

Kotter addresses the role of leadership in crafting and executing strategy. He emphasizes the need for the leadership to make change happen. Kotter provides a road map (an eight stage process) to the crafting [...]]]> Below are books that can be useful in the management of change and culture within an organization.

Kotter, John P. “Leading Change”

Kotter addresses the role of leadership in crafting and executing strategy. He emphasizes the need for the leadership to make change happen. Kotter provides a road map (an eight stage process) to the crafting and execution of strategy. The book is limited by its case study approach.

Schein, Edgar H. “The Corporate Culture Survival Guide”

Schein is the recognized corporate culture guru. He addresses the questions: What is corporate culture? How can I assess it? How can I change it? His book is a terrific intro to the subject of corporate culture.

Drucker, Peter F. “Management Tasks, Responsibilities, Practices”

A classic must read management book. Drucker is the unchallenged management guru.

Porter, Michael E. “Competitive Strategy: Techniques for Analyzing Industries and Competitors” and “Competitive Advantage: Creating and Sustaining [...]]]> Below are books that can be useful in crafting and executing strategy. These are “The Best of the Best”.

Drucker, Peter F. “Management Tasks, Responsibilities, Practices”

A classic must read management book. Drucker is the unchallenged management guru.

Porter, Michael E. “Competitive Strategy: Techniques for Analyzing Industries and Competitors” and “Competitive Advantage: Creating and Sustaining Superior Performance”

Must read – can be tedious. The first book provides a framework from which to analyze your industry and the second a framework to analyze your firm.

Kim, W. Chan and Renee Mauborgne. “Blue Ocean Strategy”

Blue Ocean Strategy is the most talked about strategy book. Challenges Porter’s notions and provides examples of how some companies have avoided the “slug feast” of competitive markets. It is worth the read.

Christensen, Clayton M. “The Innovator’s Dilemma” When New Technologies Cause Great Firms to Fail

Christensen asks, “How do innovators use disruptive technology to displace entrenched companies?” This book is not limited to tech firms. Its lessons are applicable to a wide range of industries. Christensen addresses why entrenched firms lose markets to innovators. It is very much worth the read.

Zook, Chris. “Profit from the Core” Growth Strategy in an Era of Turbulence

Describes why growth strategies are not always successful. Stresses that successful companies build growth from a well-defined core. Zook maintains that growing from the core is a source of competitive advantage. He believes it is the most viable platform for successful expansion. I highly recommend this book!